Coruscation

Primary Market - Loan Originations

Fannie Mae and Freddie Mac do not originate mortgages. More than 80% of subprime loans still outstanding were originated in 2004 through 2007. The top ten subprime loan originators in 2006 were: HSBC Finance, New Century Financial, Countrywide Financial, Citimortgage, WMC Mortgage, Fremont Investment and Loan, Ameriquest, Option One, Wells Fargo Home Mortgage and First Franklin Financial. Seven of the ten (the nonbank lenders, who were not regulated by the Community Reinvestment Act) no longer exist, or were merged into banks. The lists for 2005 and 2004 were similar, but also included Washington Mutual. The top ten lenders accounted for about 60% of ALL subprime loans in 2006.

Secondary Market - Wholesale Loan Buyers

In 2004, 2005 and 2006, securitized mortgages were 73%, 79% and 81% of all subprime mortgages. So for practical purposes the wholesale market was the securitization market. For the same three years, the total volume of subprime loans securitized was $521 billion, $797 billion and $814 billion respectively.

Almost none of those securities were issued by Fannie and Freddie. They were not in the business of purchasing and securitizing subprime mortgages, although they purchased some subprime mortgages to hold in portfolio, and issued about $6 billion in subprime securities in 2004 to 2006 (one-third of one percent of the market.) The top fifteen issuers of subprime mortgage-backed securities, accounting for about 75% of the market, in 2006 were: Countrywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, Residential Funding (GMAC affiliate), Lehman Brothers, WMC, Ameriquest, Morgan Stanley, Bear Sterns, Wells Fargo Securities, Credit Suisse and Goldman Sachs.

Continue reading "Market discipline has come to subprime" »

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There's several lines of thought here.

First, clearly, there were regulatory failures. The fact of the matter is that teaser mortgages were the result of the overriding of usury laws and preemption of state lender laws in favor of lax federal regulations that favored "the free market". And we don't have regulations of Credit Default Swaps and Hedge Funds because some powerful lobbies made "free market" arguments that libertarians accept. All these things contributed a lot more to the crisis than whether Fannie and Freddie guaranteed some loans they should have (remember, most of the bad mortgages were securitized by the private sector) or whether the government was overzealous in promoting minority homeownership.

Second, while Ilya is right about the governmental promotion of homeownership not being a libertarian idea, it is also not really one that libertarians spent a lot of effort trying to fight. Indeed, libertarians were promoting the "Ownership Society" along with conservatives, because libertarians tend to believe that property ownership has several beneficial effects on society. This doesn't mean that libertarians were necessarily supportive of efforts to lean on lenders, but it does mean that libertarians weren't exactly policing this issue (because it meant going after political allies as well as taking on an ideological contention about ownership that they had some sympathy with or mixed feelings towards).

Third, I think it's too broad to blame anything like this on libertarianism. Libertarians don't have a lot of political power; conservatives do and liberals did and will. But what Ilya seems to be really after is to counter any efforts to blame this crisis on laissez faire policies or free market policies. And that position seems untenable. Of course you can point to actions of the government that weren't good ideas which may have contributed to this. But the reality is that one of the problems with the free market is that if people can take their money out in the very short term, they don't have much of an incentive to price in longer term risk. And these mortgages lasted for 15 or 30 years. Thus, as long as someone else was going to be able to internalize the risk of a default, it made sense to make bad loans. This was true even without any pressure from the government or any "ownership society" programs.

The free market did this, because there are not any market mechanisms in the mortgage backed securities market to ensure the mitigation of long-term risk.

-- Dilan Esper responds to Ilya Somin

Continue reading "Opposing the interventionism of the Ownership Society: Who ?" »

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With financial markets in crisis and unemployment rising by the hour, many co-op boards are looking very skeptically at buyers who have large stock portfolios or who earn much of their income in year-end bonuses that may not materialize.

To counter that and to satisfy the concerns of co-op boards, these buyers are finding that they must either increase their down payment to 50 percent of the sale price or more, or put six months' to two years' worth of maintenance into an escrow account.

Some boards have also made it clear that they prefer buyers with fixed-rate mortgages over those with adjustable-rate mortgages; buyers with interest-only mortgages need not apply. These are not the sorts of requirements that appear in the bylaws or the house rules, but in this market, word gets out quickly after a board rejection.

"If you get a board turndown, you can ask how to improve the application," said Richard Grossman, the executive director of downtown sales for Halstead Property. "I've seen some approvals lately where the board tried to work with the buyer, either by asking for money in escrow for maintenance or for additional down payment to increase the equity in the apartment."
Robert J. Rosa, an executive vice president at Century 21 NYC, said that's exactly what happened in a recent deal. He represented a father buying an alcove studio for his daughter on East 21st Street. The father, an investment banker, planned to take out an interest-only mortgage even though he had about $10 million in liquid assets and could easily have paid cash for the studio.

Continue reading "NYC Co-ops Apartments: sticky on credit and price, flexible on renting" »

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Tanta of Calculated Risk, dead at 47.
A scathing yet joyous nerd.

Best of: On automated underwriting systems (AUS), underwriting cheat sheets, dogs.

First, there's the old "let's retrain a bunch of subprime loan officers to be prime GSE loan officers." You civilians might think this should be fairly easy, but the fact is that training a lot of these people to be prime loan officers basically means training them to be loan officers. If they had any basic depth of understanding of the business they're in, they could move to prime origination by just reading that other rate sheet. The reality is that they've been doing no-doc no-down no-sweat stuff for so long--some of them have never done anything but--that they're sitting around with the PlayStation waiting for someone to tell them how a 30-year fixed rate loan with a down payment and verified income actually works. Which is to say, their bosses are sitting around in the busier conference rooms trying to figure out if it's possibly worth the time and money to turn these people into mortgage experts instead of corner-cutting order-takers.

Continue reading "Tanta (Doris Dungey), RIP" »

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In 2006, the question was the canary in the coal mine question, 'Will the subprime mortgage industry meltdown, and would the meltdown spill over to other financial sectors ? '

In 2007, the question became, 'What started the meltdown ?'. Chris Whalen has an excellent summary of what we know in autumn 2007.

Continue reading "Mortgage meltdown diagnoses" »

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The OCC's second Mortgage Metrics Report shows that not only are mortgage repayment plans and especially modifications increasing, they are increasing at a faster rate than new foreclosure starts. One metric in the report is the number of new loss mitigation actions as a percentage of all seriously delinquent loans.

OCC's second Mortgage Metrics Report

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As Josh Rosner, an expert on mortgage securities at Graham Fisher in New York noted in a research piece last week, the leverage used to put such securities pools together can amplify losses. For example, a 4 percent loss in a mortgage-backed security held by collateralized debt obligations can turn into almost a 40 percent loss to the holder of the C.D.O. itself.

Continue reading "Josh Rosner, Graham Fisher: leverage amplifies losses" »

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A breif history of subprime mortgage.

But any industry this big was soon irresistible to speculators. In several waves of deregulation, the industry set out to fix something that wasn't broken and managed to slip outside the bounds of government banking supervision. In each of these cycles, free-marketers promised greater efficiency and more plentiful credit, if government regulators would just get out of the way. In each episode, however, the result has instead been increased speculation followed by huge losses and costs to the public.

Robert Kuttner

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Housingwire is a lively news source for the mortgage and residential real estate industries.

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The Implode-O-Meter is the brainchild of Aaron Krowne, a former researcher
at Emory University in Atlanta. A computer scientist and mathematician,
Mr. Krowne, 28, started the site in 2007, believing that the troubles in the
housing market, and by extension the mortgage industry, would worsen.

He was right -- and the Implode-O-Meter took off. Traffic on the site soared,
reaching as many as 100,000 regular visitors, and advertising dollars rolled in.
Mr. Krowne quit his day job and hired 10 people for his company, Implode-Explode Heavy Industries.

"The crisis has come in waves," Mr. Krowne said. "It just keeps coming."

Business: Loan Pains Turned Site Into a Hit
By LOUISE STORY
Published: July 8, 2008
The Mortgage Lender Implode-O-Meter, a Web site, is gleefully tallying the
number of lenders that run into trouble.

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The RC-C section in a FDIC CALL report shows loans secured by
real estate. Manually add up the various detail lines in RC-C,
subheading 1, to get the totals.

Total Assets - $2.118B
(RC-C.1) Loans secured by real estate $1.360B ( 64.2% )

Where does one get the RC-C.1 data?

Each bank submits CALL data to the FDIC on a quarterly basis.
The data usually becomes available 15-30 days after the quarter
ends.

Search for banks and download/view as PDF data at the FDIC
Institution Directory.

[Via CR/Comments]

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ARM (negative amortization option pay adjustable rate mortgages)
sales training at World Savings:

"So if I'm paying that minimum payment, I'm not actually
putting a dent in my principal though right? My principal and
interest they're just going to keep climbing up right?" the
borrower asks in the video tape. "It's optional," the broker
in the video replied.

Oakland, California's Golden West Financial Corp., the No. 2 U.S.
savings and loan specialized in ARMs, which comprise about
99 percent of its mortgage lending.

World Savings and Golden West are both now part of Wachovia.

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"Save the borrower" legislative proposals abound. And,

Sheila Bair, chairman of the FDIC, who proposed yesterday
that mortgage servicers freeze all adjustable rate mortgages
facing resets at their current rates.

Naked Capitalism thinks such
forbearance is doomed.

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Subprime fixed rate mortgages are performing OK.

Continue reading "Subprime fixed rate mortgage performance" »

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The firms say that since first asked to rate securities based on subprime
loans more than a decade ago, they've done the best they could with the
data they've had. "The housing market has proven to be weaker than a
lot of expectations," says Warren Kornfeld, co-head of residential
mortgage-backed securities at Moody's. This summer, the firms
downgraded hundreds of mortgage bonds built on subprime mortgages.
They say those bonds represent only a small part of the subprime-mortgage
market.

Continue reading "piggyback ratings reconsidered" »

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Q. Over the last couple of days the Times and other publications
have reported that the Federal Reserve has injected $68 billion
into the equities markets and that foreign central banks, such
as the ECB, have pumped even larger amounts of capital into
their markets.

Could you tell me precisely how this is done? Are the central
banks simply printing money to purchase the CDO’s other debt
instruments that nobody else wants to touch? If so, isn’t this
just a way of socializing the costs of bad investment through
inflation? Finally, didn’t this whole mess begin with too much
liquidity and reckless lending practices?

The Fed injects money into banks by lending dollars on the
security of high quality assets held by banks. Under the
rules central banks now follow, this is almost an automatic
action.

The Fed sets a target on the federal funds rate — the rate
on loans between banks. If the market rate rises above that
rate, it is a sign that demand for funds is greater than anticipated,
and the Fed meets the demand. Similarly, it withdraws loans if
the rate falls below that level. There was an interesting twist
on one day, in that the Fed asked that the security for loans be
mortgage securities, but those are of the type issued by Fannie
Mae and Freddie Mac, not the ones that are now questionable.
Because the Fed is not lending against bad securities, it is not
bailing out anyone. But that move enables banks to lend to
customers who own securities that cannot be sold right now.

— Floyd Norris

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The peak month for the resetting of mortgages will come this October,
according to Credit Suisse, when more than $50 billion in mortgages
will switch to a new rate for the first time. The level will remain above
$30 billion a month through September 2008. In all, the interest rates
on about $1 trillion worth of mortgages, or 12 percent of the nation’s
total, will reset for the first time this year or next.

A couple of years ago, by comparison, only a marginal amount of
mortgage debt — a few billion dollars a month — was resetting each
month.

Continue reading "Mortgage Rate Rest Peak, 2007-2008" »

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A way to measure the effects of problems in the sub-prime mortgage
sector is to look at Credit Default Swaps (CDS). Remember that these
CDS contracts effectively work as a kind of insurance policy for banks
or other holders of bad mortgages. If the mortgage goes bad, then
the seller of the CDS must pay the bank for the lost mortgage payments
(alternatively ... if the mortgage stays good then the seller makes a lot
of money).

The index that measures the CDS market for home equity is called
the ABX.HE index. The sub-variation of this index that refers to risky
sub-prime loans is called the ABX.HE BBB index.
Markit's ABX catalog.

Continue reading "ABX Mortgage Index" »

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SIFMA, the Securities Industry and Financial Markets Association
represents the industry (eponymously)..

Born of the merger between The Securities Industry Association and
The Bond Market Association, SIFMA is a 'single powerful voice'.

Example publication: Mortgage Prepayment Projection Tables,
PSA Median, CPR average, etc.

More in Quant Finance, mortgage.

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Nouriel Roubini preaches doom for the mortgage world.
Quantified doom is rather small though.

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Tanta's ubernerd tour of the mortgage business.

Mortgage Servicing
Negative Amortization
FICOs and AUS
Private Mortgage Insurance
Foreclosure and REO
MBS
Delinquency and Default
Reverse Mortgages

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“Stated income and reduced documentation loans to subprime
borrowers should be accepted only if there are mitigating
factors that clearly minimize the need for direct verification
of repayment capacity,”

“However,” the regulators added, “a higher interest rate is
not considered an acceptable mitigating factor.”

Federal Financial Regulatory Agencies Issue Final Statement on Subprime Mortgage Lending. [PDF]

Posted in mortgage.

Continue reading "Subprime Mortgages Meet Stricter Federal Rules" »

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bankersonline resource for banking regulation and practices.
Example: HMDA tour (eg Borrower Isn't
Homeowner, HMDA Reportable ? )

Continue reading "Bankers Online" »

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First he built a dictionary of 150 keywords in real estate
ads — “creative financing,” for instance — that might
signal a seller’s willingness to play loose. He then looked
for instances in which a house had languished on the
market and yet wound up selling at or even above the
final asking price. In such cases, he found that buyers
typically paid a very small down payment; the smaller
the down payment, in fact, the higher the price they
paid for the house. What could this mean?

Either the most highly leveraged buyers were terrible
bargainers — or, as Ben-David concluded, such anomalies
indicated the artificial inflation that marked a cash-back deal.

Having isolated the suspicious transactions in the data,
Ben-David could now examine the noteworthy traits they
shared. He found that a small group of real estate agents
were repeatedly involved, in particular when the seller was
himself an agent or when there was no second agent in the
deal. Ben-David also found that the suspect transactions
were more likely to occur when the lending bank, rather
than keeping the mortgage, bundled it up with thousands
of others and sold them off as mortgage-backed securities.

This suggests that the issuing banks treat suspect mortgages
with roughly the same care as you might treat a rental car,
knowing that you aren’t responsible for its long-term outcome
once it is out of your possession.

-- Freakonomic pf the week.

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'Flip This House' Star Accused of Fraud

On an episode of A&E's popular reality series "Flip This House," Atlanta
businessman Sam Leccima sits in front of a run-down house and calls
buying and selling real estate his passion.

Now authorities and legal filings claim that Leccima's true passion was
a series of scams that included faking the home renovations shown on
the cable TV show and claiming to have sold houses he never owned.

"This is, indeed, a con artist," said Sonya McGee, an Atlanta pharmaceutical
representative who says Leccima took $4,000 from her in an investment
scheme.

Continue reading "House flipper fraud: Flip This House, Sam Leccima in Atlanta" »

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Adjustable Rate Mortgage Handbook by the Federal Reserve.

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MacroBlog opines on the state of sub-prime lending today.
More at Federal Reserve's April Survey of Senior Loan Officers [pdf].

Continue reading "What is Sub Prime Today ?" »

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Kalotay's perspective on personal finance planning.

See previously Kalotay on mortgage option theory, formal modelling of
optimized mortgage refinancing, and option theoretic prepayment models.

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The meltdown in sub-prime mortgages explicated by Wall Street Folly.

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The bulk of reverse mortgages funded today are
so-called Home Equity Conversion Mortgages,
known as HECMs, which are insured by the
federal government and cap the amount
homeowners can borrow.

To cater to people with higher-value homes,
lenders increasingly are creating their own
products that don't have loan limits.
Meanwhile, the increased competition
among lenders also is driving down the
overall costs for consumers.

Continue reading "Home Equity Conversion Mortgage (HECM)" »

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The government has fairly low limits on how big a mortgage
it will insure, so borrowers in New York City, for instance,
can receive a loan of about $363,000, far less than the
area’s median home price of about $470,000.

In Fairfield County, Conn., the maximum F.H.A. loan for a single-family
home is about $363,000, but the median price in the county’s largest
municipalities is $473,000.

Congress is considering raising the maximum loan to about $600,000, which
“would obviously help a lot of borrowers, especially in the Northeast.”

-- Brian J. Chappelle, founder of Potomac Partners in Washington,
consultants to the mortgage industry.

Continue reading "FHA mortgage limit should be $600,000" »

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Am I the only one who wonders how a person who borrows
money he can't repay, buys a house he can't afford, and then
stiffs his creditors, is allowed to play the victim?

-- Michael Lewis

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As problem mortgages increase, lenders have tightened their
standards, adding further to pressures on the housing market.
As long as job growth remains strong, the housing downturn
will not derail the economy, but the impact on consumer
spending is likely to be "more pronounced".

-- Mark Zandi, chief economist of Moody's Economy.com

Continue reading "Mortgage delinquency vs job growth/unemployment" »

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By Toothpaste for Dinner.

Owning a home is for debtors, not just the rich.

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Even affluent suburbs have their share of such borrowers.

Steven Habetz, chief executive of Threshold Mortgage, a
broker based on Westport, Conn., says subprime loans
account for about 5 percent of his business. That could
drop, though, as lenders leave the market.

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First American CoreLogic projected the impact of ratereset as it relates
to mortage payment increases and foreclosure.

"Mortgage Payment Reset: The Issue and the Impact," is available at www.firstamres.com/MPR2007.

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About 20% of the loans in the subprime market "cause more than half the losses.

-- Goldman Sachs Group Inc. fixed-income strategist Michael Marschoun.

We hope this is an ex ante statement. Ex post, we would think that fewer
than 8% of all mortgages cause 100 % of losses.

Continue reading "Few loans cause many losses" »

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Risk-based Capital Requirements for Mortgage Assets, by the Federal Reserve. [ PDF ]

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Historical developments in mortgage loan volume and underwriting trends.
The significance of recent market and institutional innovations in light of
historical trends, reviews mortgage loan performance trends, discusses
the role of regulation, and considers the near-term outlook for the
mortgage lending cycle.

FDIC Summer Outlook 2006 PDF.

Continue reading "FDIC Summer Outlook 2006" »

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The recent rise in shared appreciation mortgage (SAM) availability motivates
careful consideration of underlying borrower incentives. The lender's share
of appreciation in SAMs (share) is essentially a dynamic prepayment penalty
imposed on the borrower. However, the borrower faces a moral hazard
due to his ability to affect the penalty by reducing maintenance.

We adapt a competing risks mortgage-pricing model to calculate SAM
theoretical equilibrium rates. Our borrower possesses rational expectations
of both the house price market and interest rates. Our simulation results may
help explain the lack of secondary market interest for the UK SAMs containing
extreme contract terms.

Keywords:
Shared appreciation, mortgage pricing, options, prepayment penalty, default

JEL Classifications: G21

Sanders, Anthony B. and Slawson Jr., V. Carlos,
"Shared Appreciation Mortgages: Lessons from the UK" (July 2005).
Available at SSRN.

Continue reading "Shared Appreciation Mortgages: Lessons from the UK" »

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Moody's Commercial Mortgage Metrics (Moody's CMM)

TWC/CMM

Commercial Mortgage Metrics from Moody’s and TWR,
the leading source for commercial real estate performance
and valuation forecasting.

Risk Measures provided by CMM:

Probability of Default,
Loss Given Default,
Expected Loss,
Value at Risk,
Yield Degradation,
Risk Adjusted Yield,
Distance to Default.

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Hayre L.S., Chaudary S. et Young R.A. : "Anatomy of prepayments",
Journal of Fixed Income, 10, 2000. [PDF]
The paper is actually in chapter 4 of Hayre's book:
SSB's guide to MBS and ABS.

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Trilogy by Andrew Davidson and Co (AdCo)
1. Active Passive Decomposition
2. Prepay risk and option adjusted valuation concept
3. prOAS Valuation model with refinancing and turnover risk

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"What really increases the risk of mortgage
default is if you have this payment shock coupled
with a weak economy, because a weak economy
means unemployment,"

"Family incomes are lower. And then if you layer
on top of that a payment shock, that's a trigger
event that may very well lead to a default."

quote, Frank Nothaft, chief economist at Freddie Mac.

Economic commentary, 2003-2005

Continue reading "Who's Who: mortgage economists: Frank Nothaft, Freddie Mac" »

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The fun is tranching pools of