Tag: subprime

Fannie’s Perilous Pursuit of Excuses (and Shills)

Daniel Mudd wanted the loans to “optimize the business“…

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Hmm. Just a few weeks back, Paul Krugman said (emphasis mine)…

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

You’d think a professor of economics (at Princeton University no less) might have some idea what he is talking about, particularly when allowed to regularly op-ed at the New York Times. Note that this wasn’t supposition – it was an attempt to relay facts well after the events.

Even though they’ve long been THE largest purchaser of mortgages, maybe the fact that Fannie Mae didn’t originate the pile of bad loans equates to “had nothing to do with”? I wish I knew the answer, but I’m no famed academic.

UPDATE: Oops…h/t to Paul Kedrosky on the Post story.

Tidbits to start the week

Tidbits are small, until they grow up

UPDATE (8/13/08): A week later Roubini is right.

U.S. Mortgage Crisis Rivals S&L Meltdown

Analysis courtesy of the Wall Street Journal (h/t to The Big Picture).

The charts are telling.

The “Hope Now” effect – some preliminary mortgage data

I received a note this morning suggesting that while the actual effect the “teaser freezer” program may have on the foreclosure problem is still up in the air, at least now there’s some data coming out to work with. The numbers are preliminary, and highlights are as follows:

  • There are 80 million homes, and approximately 49.6 million mortgages. The average mortgage size is roughly $202,000.
  • Roughly 63% of mortgages are fixed “prime” loans, and 14.5% are adjustable rate “prime” loans. “Below prime,” 6.3% are fixed rate, 6.8% are adjustable rate, and around 9.3% are FHA/VA loans.
  • Of the roughly 6.5 million “below prime” loans, over half have some kind of teaser rate. Of that amount, roughly 1.8 million are adjustable rate loans with resets beginning in 2008 and 2009. 2/3’s of that amount may qualify for help – the remainder, or around 600k, will have to fend for themselves.
  • Help is equally divided between rate freezes and streamlined refinancing assistance, and data suggests that around half of the refis may qualify for some FHA or VA loan.
  • Of mortgagees, roughly 2.6 million are delinquent today – how many of them have missed only one payment in the last year and/or are adjustable rate borrowers with resets within the Hope Now “window” is unclear. And there are just under one million borrowers in some level of foreclosure as we speak.

ADDITIONAL NOTE: I’ve never made hay about the subprime borrowers, seeing them simply as the high yield tranche that always rears its head when money is easy to come by. As the data above suggests, they are only a small part of the overall mortgage picture, and credit risk was already built in. It’s the 7.2 million prime ARMs, many beginning their resets the first of next year, that people should be worried about.

UPDATE: More “facts” – compliments of the White House. I’d rather see facts coming from the GAO than the Office of the Press Secretary.

Hope Now, Pay Later

Some analysts were complaining that the Treasury Department/Hope Now Consortium plan to fix some mortgages at “teaser rates” – as a way to stall the foreclosure wave – was nothing more than delaying the pain. This may be true, and the fact that mortgage backed securities investors seemed to be missing during all the planning (and press releases) meant something eerie was afoot. Judgment day has now come, and numerous borrowers are going to get government sanctioned rate freezes that fly in the face of several hundred years of contract law. With the Treasury Department noting this is “not a government subsidy” and that potential lawsuits will be “manageable,” I can’t help but think individual investors are about to get clubbed from behind.

the-negotiating-table

It’s pretty clear the quality of the loans diminishes if they are subject to rate co-opting (which is exactly what is happening here). Investors should hope that Standard & Poors does the right thing and follows through with their threat to downgrade such paper. It will serve two valuable purposes: state and local government funds will be precluded from investing, and everyone else can demand significant discounts to carry what can turn to junk whenever the political winds blow.

UPDATE: Nouriel Roubini has attempted to portray the positive aspects of the blanket bailout in what Paul Kedrosky called a “lucid” analysis. I’m inclined to categorize the take as a condescending, wholesale endorsement of socializing losses.

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Post-holiday mortgage mess

A proverbial “You ain’t seen nothing yet.”

Two views of the “upcoming” mortgage crisis, via Barry Ritholtz and Paul Kedrosky.

If you say the words “sub” and “prime” in tandem enough (like the media has), people might just begin to think it’s an isolated issue. But nobody can reject the fact that Alt-A, Jumbos, HELOCs, etc. play into this, as the linked-to illustrations suggest. In addition, the resets of non-subprime loans continue hitting peaks well into 2009 and at levels that significantly exceed those of the subprime component in the second and third quarters of 2007.

If the Fed lowers rates enough will everything be okay? That’s hard to say, particularly if you talk to the Japanese – I’m not sure anyone can fully agree that zero percent interest rates made any difference in the face of massive overvaluing of assets. Some folks will get refinanced at affordable payments, but I suspect that’s just the lesser evil. Regardless of where rates are, no amount of underwriting wizardry is going to get someone a loan of say $500k if their house appraises at $480k, that is unless they show up to closing with a check for $100k plus.

The finance sector has been waiting for “the next shoe to drop.” Valuation in the face of non-subprime resets (which ramp up in Q2/08) might just be it.

UPDATE: A telling summary:

Simply put, we haven’t hit the high-water mark of ARM distress yet. Data from Banc of America Securities suggests that ARM resets in the first four months of 2008 may exceed the value of ARM resets for the first eight months of 2007 combined.

JPMorgan Says Worst `Not Over’ for Subprime Investors