“Subprime Was The Tip Of The Iceberg”.... “Prime Will Be Far Bigger In Its Impact.”

Nothing really new but sometimes it is always good to get an update on the ongoing residential housing bust..... Scary that there are still some bottom callers out there..... I really hope that they have always put their money where their mouth was during their perma-bottom-calls.....

Das nachfolgende Posting liefert nicht wirklich bahnbrechend Neues und soll in erster Linie ein Update in Sachen US Wohnimmobilienmarkt geben. Denke hier werden all diejenigen die schon fast penetrant den Boden ausrufen als Phantasten entlarvt. Wenn man jetzt bedenkt das der Verfall im gewerblichen Sektor gerade erst Fahrt aufnimmt erscheinen einige bullische Kommentare in einem noch fragwürdigerem Licht...... Kein noch so großer Bailout kann die dringend notwendige Bereinigung verhindern.... Bin sogar der Meinung das je länger die Korrektur durch die "Eingriffe" verlängert wird desto größer wird der volkswirtschaftliche Gesamtschaden letztendlich sein. Da aber in der Realität immer irgendwelche Wahlen anstehen muß man wie die aktuellen Beispiele zeigen mit dem Schlimmsten rechnen.....

Housing Lenders Fear Bigger Wave of Loan Defaults NYT
The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

Delinquencies on mortgages tend to peak three to five years after loans are made....

Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights

> You don´t need to be a genius to figure out will happen during the next few years..... The following quotes from Calculated Risk sums it up

> Denke hier braucht man nun wirklich kein Genie zu sein um zuerkennen das die nächsten Jahre brutal werden. Der nachfolgende Kommentar von Calculated Risk dürfte zutreffen.....

I think the second wave of foreclosures will be smaller in numbers, as compared to the largely subprime first wave, but the price of each home will be much higher. And the second wave will impact prices in the mid-to-high end areas, as opposed to the subprime foreclosures impacting prices in the low end areas.

Barry Ritholtz on "perma-bottom-callers"

Wishful thinking is never a substitute for reviewing the actual data;
thoughtful analysis is better than cheerleading

UPDATE: Click trough pages 61 & 62 from the HSBC Earnings Release to get an up to date picture of their US mortgages, consumer lending, credit card and vehicles credit book.... I also want to highlight page 12 & 13. They are showing the credit trends worldwide ( personal & commercial ) ...... Watch Latin America ( mainly related to Mexico ) ......

UPDATE: Passendweise hat gerade HSBC berichtet. In diesem Report findest man auf den Seiten 61 & 62 Daten nette Charts zu der US Kreditqualität quer durch alle Sektoren ( Kreditkarten , PKW Finanzierungen usw ). Darüberhinaus sollte man einen Blick auf die Seiten 12 & 13 werfen. Hier werden die weltweiten Rsikovorsorgen für den privaten und den gewerblichen Sektor aufgeschlüsselt. Hier sticht besonders und für mich etwas überracshend der starke Anstieg in Süd Amerika hervor ( Lt. Telefonkonferenz überwiegend Mexico )...... Die 200% Aufstockung der Risikovorsorge im gewerblichen US Bereich dürfte erst der Anfang sein.....

Which “inning” of the mortgage crisis are we in? / Hussman

Once again nice "Anti Spin" from Hussman. And don´t forget that after the mortgage crises we will see the commercial real estate crises, the credit card crises, the auto loan crises.......

Einmal mehr wohltuend sachliches von Hussman der einmal mehr die in den Raum geworfenen Behauptungen in ein rechtes Licht zu rücken versucht. Ist zwar bei dem ganzen Müll ein fast aussichtsloses Unterfangen aber bewahrt vielleicht den ein oder anderen den "Rattenfängern" oder Permabullen auf den Leim zu gehen. Und man sollte im Hinterkopf verankert haben das nach der Hypothekenkrise, die Krise der gewerblichen Immobilien, die der Kreditkarten, der Autofinanzierungen usw. kommt.

Which "Inning" of the Mortgage Crisis Are We In?

One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence. Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to “look across the valley” on the belief that most of the writedowns are behind us.

A good way to estimate where we are in the process of writedowns and foreclosures is to revisit the schedule of resets for adjustable rate mortgages.

The chart doesn't extend out to 2010 ( see extra chart Credit Suisse), where another spike in resets will occur in the third quarter of that year, but it is enough to recognize that resets are only now entering the heavy period.

To understand the implications of this schedule, it is important to recognize the foreclosure timeline. Once a reset occurs, it takes up to 30 days for the first payment to be missed. After 90 days of attempts to catch up on missed payments, the homeowner is served with a “Notice of Default.” It then takes another 90 days with the homeowner in default for a “Notice of Trustee Sale” to be delivered, shortly after which the property is sold in a foreclosure. In short, there is generally a span of about 6 months from reset to foreclosure, which means that we have to lag the data to get the profile of anticipated loan losses.

Fortunately, only a portion of the mortgages that reset will actually go into default, but we estimate which “inning” we are currently in by calculating the cumulative amount of mortgages that will have reset at each point in time (i.e. integrating the curve), and lagging it by 6 months (roughly the span between reset and foreclosure). That produces the following profile for the cumulative losses that can be expected. Again, these are not dollar amounts, since only a portion of even sub-prime mortgages will default. While we will also undoubtedly observe losses from credit cards, commerical real estate, and home equity loans, the point here is only about the general shape of the cumulative loss curve:


Clearly, as we enter April 2008, we appear to be quite early in the mortgage crisis, with only about a quarter of the cumulative resets having occurred. That places us near the start of the third inning, where we can expect each of the nine “innings” to be about three months in duration. Unfortunately, the next three innings (quarters) are when the heavy hitters on the opposing team will come up to the plate, as the cumulative amount of resets will surge. With that surge, loan losses and foreclosures will also predictably spike higher.

Moreover, because of the bundling, securitization*, and slicing and dicing of mortgage obligations, financial companies have little ability to take the required writedowns in advance, because they don't know yet which ones will go into default. To opine that we are in some late “inning” of the mortgage problem, without reference to the reset data, is just naïve. If anything, the probable rate of foreclosure on later resets will be higher, not lower, than the earlier resets, because those later resets represent the mortgages initiated at the peak of home prices and the trough of lending standards.

"Fools Day" With The Greatest Fool UBS

I have suspended my temporary time out. It took a little longer than initially planned. Due to time constraints my postings in the future will be lighter than before the break. Thanks for all the kind words and mails during the break.

I think it is a good start to kick off the "Fools Day" with news from the the greatest fool UBS. I suggest to read the Q4 details to understand all the drama in the specific positions.

With still close to $ 30 billion ( even if some positions are hedged ) exposure in Subprime and Alt A i expect further write downs and a break up of UBS during the coming 6 to 12 month....

Ich habe meine zwischenzeitliche Auszeit beendet. Sie hat ein wenig länger als ursrünglich geplant gedauert. Aufgrund von Zeitproblemen wird das Posting zukünftig wohl auch weniger häufig ausfallen. Auf diesem Wege möchte ich mich bei allen für die netten Mails und Kommentare bedanken.

Es gibt wohl kaum einen besseren Weg den 1. April mit Neuigkeiten von der UBS zu eröffnen. Bei den nachfolgenden Summen handelt es sich leider um keinen Aprilscherz. Ich empfehle um das ganze Ausmaß des Debakel zu erfassen sich die einzelnen Positionen aus Q4 "reinzuziehen".

Mit immer noch knapp 30 Mrd $ an Subprime und Alt A Positionen ( selbst wenn einiges gehedged sein sollte ) dürfte die nächste Abschreibung schon in Stein gemeißelt sein. Ich tippe weiterhin das die UBS binnen der nächsten 12 Monate aufgepalten wird.

UBS

For the first quarter 2008 UBS expects to report a net loss attributable to UBS shareholders of approximately CHF 12 billion after losses and writedowns of approximately USD 19 billion on US real estate and related structured credit positions. In the first quarter, UBS substantially reduced its real estate related positions through both valuation adjustments and significant disposals

Over the first quarter, UBS's exposure to US residential sub-prime mortgage related positions declined to approximately USD 15 billion from USD 27.6 billion on 31 December, and the exposure to Alt-A positions was reduced from USD 26.6 billion to approximately USD 16 billion. These developments are the result of asset disposals as well as the effects of further writedowns. Other risk positions were also reduced. Auction rate certificate positions increased from USD 5.9 billion on 31 December to approximately USD 11 billion

UBS

Für das 1. Quartal 2008 erwartet UBS einen den UBS-Aktionären zurechenbaren Reinverlust von ungefähr CHF 12 Milliarden nach Verlusten und Abschreibungen in Höhe von ungefähr USD 19 Milliarden auf Positionen US-Immobilienmarkt und damit zusammenhängenden strukturierten Krediten. Im 1. Quartal reduzierte UBS ihre Positionen im US-Immobilienmarkt in erheblichem Masse. Dies geschah einerseits durch Wertberichtigungen, anderseits durch Veräusserungen.

Im 1. Quartal 2008 hat sich das Engagement von UBS in US Subprime-Hypotheken auf ungefähr USD 15 Milliarden verringert (von USD 27,6 Milliarden am 31. Dezember 2007). Das Engagement in Alt-A-Positionen wurde von USD 26,6 Milliarden auf ungefähr USD 16 Milliarden reduziert. Weitere Risikopositionen konnten ebenfalls verringert werden. Die Positionen in Auction Rate Certificates erhöhten sich von USD 5,9 Milliarden am 31. Dezember 2007 auf ungefähr USD 11 Milliarden

UBS: The writedown and the (analysts') reaction FT Alphaville

The Q1 loss is approximately CHF 12 billion. That includes the CHF 18 billion write-down partly offset by CHF 2 billion of fair value accounting gain on your own debt and CHF 3.8 billion of fair value accounting for the option embedded in the mandatory convertible - or, said another way - the money GIC lost when it bought the UBS mandatory convertible. That last part was unexpected by us, and still seems a bit odd.

UBS’s 1Q08 net profit benefited from a CHF6bn positive accounting gain on revaluation of own debt and the mandatory convertible.

UPDATE: Deutsche Bank sees $3.9 billion mark-downs in Q1

Deutsche Bank said Tuesday that conditions have become significantly more challenging during the last few weeks and it expects first quarter mark-downs of around 2.5 billion euros ($3.9 billion). The mark downs are related to leveraged loans and loan commitments, commercial real estate, and residential mortgage-backed securities (principally Alt-A). Deutsche Bank said that it expects a BIS Tier 1 capital ratio at the end of the first quarter of between 8 and 9%, consistent with the bank's published targets

Compare this with the bragging just a few weeks ago......

Vergleicht das mit der Prahlerei von Ackermann von vor gerade einmal 8 Wochen.....

“In the fourth quarter, we again demonstrated the quality of our risk management. We had no net write-downs related to sub-prime, CDO or RMBS exposures. Those trading businesses in which we reported losses in the third quarter produced a positive result in the fourth quarter. In leveraged finance, where we had significant write-downs in the third quarter, net write-downs in the fourth quarter were less than EUR 50 million.”

SCHADENFREUDE!

IndyMac Increases Credit Reserves 47 Percent to $1.39 Billion

This number from the top Alt-A originator ( 14 percent) gives a hint how ugly the situation has become beyond subprime.

That might give a hint how bad the situation for several other players is that have bought back shares hand over fist during the past years and are more involed in subprime, havn´t sold their originations etc......

bigger / größer via Calculated Risk

Forecasted Home price depreciation ranging between 6% and 10% is factored into our loss expectations that drive valuation and reserves – average HPI declines expected to be around 9%

Diese Zahlen von dem Top Alt-A Kreditgeber ( 14 %) geben ein paar klare Indizien das neben Subrpime auch andere Segmente massiv an Qualität verlieren.

Das läßt erahnen wie übel es für andere Institute aussehen muß die im Gegensatz zu IndyMac in den letzten Jahren haufenweise Aktien zurückgekauft havben und sinnlose wertvernichtende Übernahmen getätigt haben aussehen mag. Ganz zu schweigen von denen die Ihre Riskiken nicht weiterreichen konnten und noch stärker im Subprime Sektor engagiert waren.....

We Hold Direct Credit Risk On $19.02 Billion Of Total Single Family Loans Serviced In Our Whole Loans And In Non-Investment Grade And Residual Securities

> Watch the large percentage of homebuilder credit costs....

> Man beachte den gewaltigen Anteil der Rückstellungen für die Homebuilder.....

In the call they said that they had claer signs in 2005 that the market for builders has peaked, but they have ignored it. Now they are paying a high price. They have stopped making any loans to builders and have no intend to re-enter the market soon.

Im CC hat das Management zugegeben das bereits Ende 2005 ganz klare Anzeichen für Probpleme bei den Buildern zu erkennen waren. Dummerweise wurden diese ignoriert und es wirde munter weiter verliehen. Nun kommt die Rechnung. Immerhin haben Sie versprochen dieses Segment nicht weiter zu bedienen und bis auf weiteres keine neuen Kredite zu begeben.

IndyMac Bancorp Reports Third Quarter Loss of $202.7 Million, ($2.77) Per Share

• Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (“EPS”) of $3.40.
• Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.
• After surviving the global liquidity crisis in 1998 as a REIT, we purchased a federally chartered thrift and put our entire business inside the thrift, with the result that we have no liquidity issues today, while many mortgage companies have gone bankrupt or recorded massive losses due to liquidity shortfalls.
• We protected and bolstered our capital by not repurchasing any shares since 2002 and, in fact, raised a substantial amount of capital in 2007.
• We held virtually no subprime, closed-end seconds or HELOCs for investment purposes ($112 million, or 0.3 percent of total assets at September 30, 2007).
• We were not a major subprime lender, ranking 32nd among subprime lenders (according to the National Mortgage News 2006 survey). Our subprime volume in 2006 was $2.7 billion, or 0.39 percent of the total subprime market.
• While we originated $43 billion of Option ARMs from 2005 through Q3-07, we sold all but $1.0 billion (held for investment) and $2.6 billion (held for sale), and we retained no non-investment grade or residual securities related to these loans.
• We laid off virtually all Alt-A 2005/2006 credit risk into the secondary market, retaining only $7.0 million in non-investment grade and residual securities from this production.
• We hold no investments in collateralized debt obligations (CDOs) or structured investment vehicles (SIVs) and only hold mortgage backed securities (93.5 percent of the investment grade MBS are rated AAA and AA, none of which have been downgraded).
• We made one of the only successful acquisitions this decade in the mortgage business – Financial Freedom, the largest reverse mortgage lender in the nation – while virtually all other significant acquisitions have produced very poor results.

> Almost all of the new liquidity is coming from the Federal Home Loan Banks ......

> Fast die ganze zusätzliche Liquidität kommt von Seiten der Federal Home Loan Banks ......

Our operating liquidity is at an all time high of $6.3 billion at 9/30/07, up 54% from $4.1 billion at 6/30/07, and we have no reverse repurchase borrowings or extendable assetbacked commercial paper…95% of our borrowings are deposits, FHLB advances and long-term debt

> the next slide shows a nice Level 3 aka "Mark-to-Make-Believe Gains" etc gain. Wonder why they havn´t used an assumption that would have cover the entire loss from the credit costs.......... Maybe they are conservatice.......

> Nebenbei bemerkt zeigt die nächste Grafik das auch hier mal wieder ein nicht ganz unerheblicher Level 3 aka Mark-to-Make-Believe Gains etc Gewinnbestandteil. Schon erfreulich das Sie nicht gleich eine Berechnungsgrundlage berechnet haben die gleich die gesamten Verluste im Zusammenhang mit den Kreditkosten abdeckt...... Evtl. ist IndyMac ja betont konservativ......

I want to highlight the IndyMac Presentation / pdf that is full of details about every aspect of the mortgage market

Ich möchste Euch in diesem Zusammenhang die IndyMac Präsentation / pdf ans Herz legen die vollgepackt mit Details zur aktuellen Verfassung der Hypothekenmärkte ist.

ANGST Backed Securities / Economist

Here we go...... I don´t know how the the Economist got to this number( see new link Asia Times further down). But if this is true it is clearly a form of a bailout......And this would explain in some part why the window is tapped from Citi, JPM & Co.... If this is true I think we will see much more during the next days especially from weaker players......At least they are now channeling the liquidity where it is needed....

Es geht los......Ich habe keine Ahnung wie der the Economist zu dieser Annahme kommt ( siehe neuer Link von der Asia Times weiter unten). Sollte sich das als wahr herausstellen erfüllt das für mich den Tatbestand eines "Bailouts". . Das würde auch zum Teil erklären warum Citi, JPM & Co.... dieses Fenster so intensiv genutzt haben. Sollte das den Tatsachen entsprechen gehe ich jede Wette ein das wir hier in den nächsten Tagen besonders von den schwächeren Marktteilnehmern haufenweise Transaktionen sehen werden..... Immerhin sollte so die Liquidität zielgerichtet erhöht werden....

The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired).

Thanks to Solvent Celt !

Hat tip to Professor Bear for provinding this link

Central bank impotence and market liquidity/ Asia Times

‘Chairman Bernanke has now summoned his own clean-up team into action. The Fed hopes that by assuring banks that they can now access cash on less punitive terms from the Fed discount window, collateralized by the full “marked to model” face value of mortgage-backed securities, rather than the true
distressed value as “marked to market”, for which they could find no buyers at any price in recent weeks as the market for such securities has seized up, it can jumpstart market seizure for mortgage-backed commercial paper and securities.’

Here is a another view from iTulip

Bernanke: Talks the Dove, Acts the Hawk / iTulip

Paper losses / Economist

Central banks struggle to restore calm without breeding complacency

....Some commercial paper is easy to understand: a big company sells an IOU, which it repays in, say, 90 days. This stuff got the American financial system into trouble in 1970, when Penn Central Railroad defaulted on $82m-worth. The recent problems stem from a different brand of paper, backed not by the good name of a big company, but by assets, such as mortgages or credit-card receivables. Mostly held off-balance-sheet by bank-sponsored “conduits”, this market has boomed in recent years. It now accounts for roughly half of the more than $2 trillion of commercial paper outstanding. But issuers have been caught out by a cashflow mismatch, says Louise Purtle of CreditSights, a research firm. Funding is short term but the proceeds are invested in longer-term assets, leaving issuers vulnerable when investors start to doubt the quality of those assets and want out.

That is what happened at the start of this week as money-market funds sold these IOUs, causing rates to spike as never before (see chart). This paper suffered from two main layers of mistrust. First investors are worried that the banks won't always be able to support the conduits.
The second worry, about the mortgage collateral, is particularly stark. Rating agencies badly misjudged default rates in subprime mortgages and are now having to downgrade reams of securities linked to them. With the credibility of ratings in tatters (there have even been calls for Warren Buffett to take over Moody's), investors have been left without a compass. For the time being, many would rather pull back than trust in their own analysis of credit risk. They are staying on the sidelines because they can't work out what securities are worth, not because they don't have the money to buy them.

Ratings may be in doubt, but they remain powerful. The Fed has been offering 85% of face value for AAA-rated paper presented at its discount window, even collateralised-debt obligations stuffed with subprime mortgages (as long as they are not—yet—impaired). Josh Rosner, a critic of the rating agencies, thinks it extraordinary that, despite their obvious flaws, they “continue essentially to regulate the behaviour of even the central bank”.

Home truths
Even if stability returns to markets, the repricing of risk is likely to continue. How far it goes will depend largely on the state of the mortgages that serve as collateral for many of the newfangled instruments that were, until recently, hawked with glee on Wall Street. The outlook is not good. Not only do subprime delinquencies continue to rise, but defaults on prime and Alt-A loans (those to good- or middling-quality borrowers) have started to climb too. Figures released this week showed foreclosures in July up by 9% compared with June, and by 93% over the year before. ....

A jam in the flow of credit to homebuyers threatens an already vulnerable economy. If consumers seek to pay down debt in response to falling house prices, spending will suffer, especially with unemployment creeping up. ...

got gold..... ?

Countrywide Says `Unprecedented Disruptions' May Hurt Profit

Why is anybody surprised? Just read Countrywide .... Genius At Work...... to understand that this management is almost criminal and was mainly acting only to the benefit of themselves to unload their stock options. Here is a must see example via Mish of how unethical (to put it mildly) this guy is. Needles to say that Cramer praised Countrywide just a few month ago......

Wer ist hier überrascht ? Es langt sich Countrywide .... Genius At Work...... durchzulesen um zu verstehen das bei diesem Management der Laden den Bach runtergeht. Hier wurde in erster Linie darauf geachtet das Aktienoptionen versilbert werden konnten. Hier ein Beispiel das mehr als alles andere zeigt wie kriminell speziell der CEO agiert. Es ist überflüssig zu erwähnen das Guru Cramer die Aktie noch vor ein paar Monaten als "die Aktie" im US Hypothekenmarkt gepriesen hat

Aug. 10 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces ``unprecedented disruptions'' that may crimp profit, suggesting a credit crunch that started with the U.S. subprime market will spread.

Countrywide won't be able to sell as many of its loans as expected because investor demand has dried up, the Calabasas, California-based company said in a filing with the U.S. Securities and Exchange Commission. It also said it may have difficulty obtaining financing from creditors. Shares of the company fell as much as 13 percent in after-hours trading.

``The secondary market and funding liquidity situation is rapidly evolving, and the potential impact on the company is unknown,'' Countrywide said.

Shares of Countrywide, which have lost a third of their value this year, fell to $25 in late trading from $28.66 at yesterday's close in New York Stock Exchange composite trading.

``We are experiencing home price depreciation almost like never before, with the exception of the Great Depression,'' Countrywide Chief Executive Officer Angelo Mozilo said during a conference call with investors last month.

> Here are some thought on the real estate market 1929 vs 2007

> Der amerikanische Immobilienmarkt damals (1929) und heute (2007)

Countrywide's allowance for credit losses was $531.1 million as of June 30, almost double the amount on Dec. 31, it said in the filing.

More Consolidation
Countrywide again assured investors that it has enough cash to cope with a credit crunch and said it may benefit as the industry's capacity shrinks. The company said earlier this week that it had access to $186.5 billion at mid-year.

> Not a o good sign when you have to do that.....

> Kein gutes Zeichen wenn man diesen Schritt gehen muß....

Still, Countrywide said it was no longer trying to sell $1 billion of subprime mortgage loans and would instead hold them as investments ``for the foreseeable future.'' The loans now have a value of about $800 million, Countrywide said.

Now he must address an increase in missed payments for prime loans, or those granted to borrowers with good credit histories. The company set aside $292.9 million for loan losses in the second quarter, compared with $61.9 million a year earlier, as it earmarked $181 million for prime home-equity loans.

> Time to take a look at all the houses that are weighing on the Countrywide balance sheet.... If they will survive they should considering to become a REIT :-)

> Zeit sich mal die Immobilien anzusehen die momentan die Bilanz belasten......Sollte Countrywide diese Krise überstehen in Erwägung ziehen als REIT zu firmieren :-)

Thanks to Dimitris and his excellent Countrywide Foreclosures Blog

Countrywide accounts for almost a fifth of all mortgages made in the U.S. The company revised its forecast of new loans to $420 billion to $500 billion this year, from $450 billion to $550 billion predicted in April. It extended $123.1 billion in new loans during the second quarter, 15 percent more than a year earlier.

Disclosure: Short KBW Mortgage Finance Index (including Countrywide)

Delinquencies Subprime, Prime, Total

click on the headline to read the entire story

klickt bitte auf die Überschrift um die vollständige Geschichte zu lesen

The delinquency rate on prime loans rose in the first quarter to 2.58% from 2.25% a year earlier. For subprime loans, the rate increased to 13.77% from 11.5%.

Delinquency rates on prime adjustable-rate mortgages rose to 3.69% from 2.3% a year earlier. On subprime ARMs, the rate climbed to 15.75% from 12.02%

> and when looking at this graph it should be clear which trend the delinquency rate will take......

> und bei Betrachtung dieser Grafik sollte klar sein welche Richtung die probplematischen Kredite einschlagen werden.....

The Housing Project Update / PIMCO

good take from pimco. please make sure you read the comments on the ofheo data that is used from pimco for their charts.

gute bestandsaufnahme von pimco. möchste euch noch besonders aie erläuterungen zu den ofheo daten hinweisen die ich eingefügt habe und die pimco in einigen bereichen (charts/text) zitiert.




In 2005, PIMCO forecasted home price appreciation (HPA) of 5% for 2006, with stronger gains in the first half of the year and smaller gains through the second half. The OFHEO (Office of Federal Housing Enterprise Oversight) home price index appreciated by 5.9% in 2006, with the largest gains occurring early in the year. This represented the smallest annual increase since 1999.
2006 marked an inflection point for the U.S. housing market. Although home prices continued to rise, the rate of increase slowed and some regions began to see price declines. The most drastic impact of the housing slowdown was felt in the subprime sector (mortgage loans to lower credit-quality borrowers) where mounting delinquencies and losses squeezed already-thin profit margins for mortgage lenders, forcing some to shut their doors. PIMCO believes that mortgage finance was critical to the rise in home prices since 2000, and also will be critical to the period ahead, which undoubtedly brings a correction of some sort. We want to answer the question: How much of a correction?

Housing Data
In 2005, PIMCO forecasted home price appreciation (HPA) of 5% for 2006, with stronger gains in the first half of the year and smaller gains through the second half. The OFHEO (Office of Federal Housing Enterprise Oversight) home price index appreciated by 5.9% in 2006, with the largest gains occurring early in the year. This represented the smallest annual increase since 1999. ( read more about the often misleading ofheo data http://tinyurl.com/37mszm / unter dem link mehr infos zu den nicht immer repräsentativen ofheo daten )

this are comments from paul in jax and deb on the ofheo data.

• OFHEO data is great, but remember this news is about six months old
• The OFHEO data is not terribly relevant for many high priced metro areas.
  The methodology uses only “TRANSACTIONS INVOLVING CONFORMING, CONVENTIONAL MORTGAGES PURCHASED OR SECURITIZED BY FANNIE MAE OR FREDDIE MAC”.
• How many transaction in Los Angeles or similarly high priced cities meet this criteria? I would guess only a small fraction.
• So they are basing this entire index on the sales at the VERY BOTTOM entry level into the market, and most likely transactions involving somewhat more qualified buyers who can actually get standard financing meeting GSE guidelines.
  

Despite the continued growth of the average housing price, there was substantial variation between different regions. Several states saw price declines in the 4th quarter: California, Hawaii, North Dakota, Nevada, and Nebraska. Michigan became the first state to see a year-over-year decline in several years, primarily due to employment weakness in the auto industry.

thanks to barry ritholtz http://bigpicture.typepad.com/

Most housing indicators turned lower in 2006. New and existing home sales both fell during the year. Sales of existing homes were down 7% for the year and 13% from their 2005 peak. The drop in new home sales was slightly more pronounced, plummeting by as much as 23% before recovering to finish the year 11% lower. The number of vacant homes for sale increased by over 34% and homebuilders are coming under increasing pressure to control the surging inventories. The housing supply has continued to increase early in 2007 and the number of vacant homes for sale now stands at over 2.1 million (2.7% of all homes).



New vs. Existing Home Sales
The new home sales and price data for 2006 was volatile and we believe the reason is important. In the early ’90s California housing recession, only one of the top 10 builders was a public company. Today, nine of the top 10 homebuilders are public companies. This is important because equity investors punish public companies for high inventory. We have long expected to see the builders cut prices to unload new homes, which they did in 2006. We also believe prices were softer than the reported data reflect because instead of cutting the sales price, a builder often will include several thousand dollars of upgrades, which aren’t reflected in the sales-price data.
Existing home sales are a more stable indicator of sales volume for the bulk of the housing stock. Unlike new homes, where the owner is a builder who is a highly motivated seller, an existing homeowner will most often stay in the home rather than discount the price heavily. As a result, many existing homes that don’t sell quickly simply are taken off the market.


What’s More Important: Volumes or Prices?
We believe the volume of homes sold holds more significance because it has considerable second-order effects on the economy. A slowdown in housing leads to a reduction in employment not only for builders and construction-related sectors, but also for mortgage lenders, appraisers, brokers, and realtors. More importantly, it triggers a substantial decline in consumption. Fewer homes being sold means that there are fewer people buying new furniture, electronics, and other goods and services that normally accompany a new home purchase.

Mortgage Lending: Subprime Finally Weakens
If mortgage lending was fuel for the housing bonfire since 2000, it was the firehose in late 2006 and early 2007. ......

There is no doubt that higher HPA in previous years has limited losses from riskier loans, but performance for the 2006 vintage deteriorated rapidly amidst the combination of a housing slowdown and increasingly liberal underwriting standards

make sure you read this brilliant piece from rodger rafter with even scarier charts than the above from pimco. http://tinyurl.com/2fqgva

ihr solltet euch unbedingt noch mehr charts von rodger rafter ansehen. bitte auf den link klicken http://tinyurl.com/2fqgva

Tale of Two Mortgage Markets: Prime vs. Subprime
The rapid growth of subprime lending since 2000 and the innovation it has brought to the mortgage market generate a lot of interesting and alarming headlines, but the prime market actually comprises the majority of US mortgage loans, and has been unaffected substantially by the housing slowdown.

What distinguishes a prime loan from a subprime loan? Ask 10 mortgage professionals and you’re likely to get 10 slightly different answers, as there isn’t a single standard definition. ....

but it in very important to know that the last years subprime and alt-a have exploded! that is the area where the danger is......so the overall number from pimco gives only one side of the story. the foreclosures are coming in the segment fast and furious.....

es ist allerdings sehr wichtig zu wissen, das der subprime und alt-a bereich in den letzen jahren explodiert sind. hier liegen die probleme. so die gesamtnummer gibt ein verzerrtes bild wieder. die zwangsvollstreckungen kommen genau aus diesem segment.

The prime market, on the other hand, is the traditional market that has served several generations of homeowners – typified by a 30-year or 15-year fixed rate, a 20% down payment, and a FICO or credit score above 700. The majority of these high-quality loans are sold into MBS (mortgage-backed securities) and guaranteed by one of the mortgage agencies – Ginnie Mae, Fannie Mae, or Freddie Mac. (Most subprime loans are not credit-eligible to be sold to the agencies.) Agency MBS have been unaffected by the housing slowdown.

Spreads on high quality MBS and AAA-rated ABS remain near historic tight levels, but lower-rated bonds have widened substantially. Investors increasingly are differentiating or tiering between originator/servicer quality, loan quality and many other aspects of mortgage credit – something PIMCO has been doing actively for some time. Mortgage credit analysis is granular, credit-intensive, and bond-specific. Generalities rarely apply.

The lenders that are most likely to emerge from the downturn are those with a significant, complementary prime mortgage business such as Countrywide, Wells Fargo, Chase, and Bank of America.

Outlook for 2007:
PIMCO expects the housing slowdown to continue in 2007 with a steeper decline in home sales than for home prices. New home prices should fall the most since they appreciated the most relative to existing housing during the run-up in prices. Attempts by homebuilders to reduce heavy inventories also will put downward pressure on new-home prices. The National Association of Realtors index, which tracks median home prices, should fall by 4-5% in 2007. The OFHEO index tracks repeat sales and PIMCO expects it to decline by over 1% this year (new home sales have little impact on this index).

The slowdown in housing should drag GDP down by approximately 1% over the next several quarters. Due to the multiplier effect that a slowdown has on consumption, it is likely that the impact on the economy will be even more substantial.

We expect the problems in the subprime market will result in continued consolidation of lenders, as the weaker players are not able to sustain loan production volumes or meet the tighter standards that are currently underway. Due to this consolidation, we expect to see subprime issuance decrease dramatically in 2007–2008. Much contraction has already taken place as year-to-date issuance has dropped nearly 10% compared to 2006 at this point in time. We envision a credit squeeze among low FICO, high loan-to-value and first-time homebuyers who are used to liberal credit standards.

It is likely that the poor performance we have seen in subprime loans will carry over to some degree into the most aggressively underwritten loans in the “Alt A” and possibly Jumbo prime markets.

We do not believe prime loans will be materially affected. The pronounced problems in the subprime market will not disappear as quickly as they emerged; instead we believe it will be a long process that will take perhaps years to correct.

PIMCO has often compared the housing market to a supertanker – a massive ship which takes 23 miles to come to a stop after being thrown into full reverse. (couldn´t resist..)

We believe we are in the middle of a downturn, not at the end, and that the problems created by expensive housing, overstretched consumer finance, and years of Fed tightening have yet to take their full toll on the US housing market.

Subprime Loan Meltdown Engulfs Even Borrowers With Good Credit

comeback of the down payment. what a revolutionary concept.....

die rückkehr ner anzahlung......was sind für deutschen doch manchmal genial......

March 22 (Bloomberg) -- The subprime credit crunch is beginning to ensnare even borrowers with good credit.

Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.

``It's going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,'' .... Companies that buy the loans ``are all saying if they haven't eliminated them yet, they'll eliminate them shortly.''

Tighter lending standards may slash subprime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit.

Pulling Back
Bear Stearns Cos., General Electric Co.'s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they're pulling back from buying Alt A mortgages sold with no down payment or in a refinancing of the house's entire value. Such companies facilitate the mortgage market by buying loans and repackaging them for sale as bonds to buyers such as insurers and hedge funds.

Mortgages are categorized as Alt A when they fall just short of the typical standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage companies. Besides some loans requiring no down payment or proof of income, they are often made to buy a second home, a rental unit or to speculate on real estate. Also often falling into the category are loans that are ``option'' adjustable-rate mortgages, whose minimum payments can fail to cover the interest owed.

Defaults Rising
Consumers borrowed 100 percent of their home's value on about 18 percent of Alt A loans made last year, according to Bear Stearns, the largest mortgage-bond underwriter. Another 16 percent had loan-to-value ratios above 90 percent as well as limited documentation, they say. ( that makes them today loans with close to 100%...../ das dürfte die meisten dieser kredite zu 100% darlehen machen...)

The category comprised about 5 percent of new loans in 2002, according to Credit Suisse. Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on subprime ones, to about 2.4 percent, according to bond analysts at UBS AG. Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as subprime loans, according to Citigroup Inc. and Bear Stearns analysts.

Rapid credit tightening that's ``been isolated to the subprime world has really migrated'' in the past two weeks to Alt A offerings that involve borrowing nearly all of a home's worth, ..... ``We're just hopeful it will settle down soon.'' ....

Limits Welcomed
Some lenders say it's high time that buyers are discouraged from buying real estate with no money down.

``Could we have a little skin in the game from the borrower, please,'' said Rick Soukoulis, chief executive officer at LoanCity, a San Jose, California-based lender that stopped making mortgages last week to customers who want to borrow more than 95 percent of the value of their house due to the shrinking secondary market. ``Something to lose if you go into default?''

(they better shoul have been carefull in the years 2004-2006..../ das hätte er mal besser in den vergangenen jahren machen sollen ....)

LoanCity, which made about $6 billion in mortgages last year, went out of business on March 20. http://mortgageimplode.com/

The slump in subprime loans has ``drastically eroded'' appetite for bonds backed by Alt A loans, according to a March 9 report by Credit Suisse. The extra yield that investors typically demand on the parts of the securitizations with the lowest investment-grade ratings have risen to 3.50 percentage points over the one-month London interbank offered rate from 2.15 percentage points in September, according to Bear Stearns.

Resale Woes
``If you couldn't sell something, you wouldn't do it either,'' UBS analyst David Liu in New York said. Part of the problem is falling demand for ``piggyback'' home-equity loans used to make down payments, he said.

New York-based Citigroup will no longer buy home-equity loans made to borrowers who won't prove their incomes and want more than 95 percent of their home's value, according to e-mails from salespeople. Mark Rogers, a spokesman, declined to comment.

New York-based Bear Stearns, the third-largest Alt A lender according to newsletter National Mortgage News, last week stopped buying such loans without down payments of at least 5 percent. For borrowers not fully documenting incomes or assets, the maximum loan-to-value ratio will be 90 percent.

Bear Stearns' EMC Mortgage unit told loan sellers of the changes on March 13, giving them a day's notice. On Feb. 26, EMC said it would start requiring down payments of only 5 percent in the low-documentation category, giving sellers until March 12 to submit loans under the old standards. On March 1, the deadline moved to March 6. EMC didn't change ``full documentation'' programs then.

...People who qualify for prime mortgages don't experience any trouble getting a loan.

Lower Standards
Bear Stearns will finance 25 percent to 30 percent fewer non-prime mortgages this year as it tightens credit, Chief Financial Officer Sam Molinaro said on the company's earnings call last week.

``Last year, we did about 50 percent less in subprime than we did the year before,'' Mary Haggerty, co-head of Bear Stearns' mortgage finance department, said in an interview, adding that it has been tightening Alt A standards since December. ``We always try to be ahead of the market.''

i cannot resist... bear sterns was not ahead of the curve upgrading new century just a few days befor the implosion and it has also lend big money to new century.....

da kann ich einfach nicht wiederstehen....bear war nicht ahead of the market als sie new century ein paar tage vor der implosion heraufgestuft haben. zudem haben sie etliche 100 mio$ kredite an new century ausstehen......

Other banks to provide credit facilities to New Century include Deutsche Bank, with $1bn, and Credit Suisse, with $1.5bn along with a slew of US lenders including Citigroup, Bear Stearns and Bank of America. http://tinyurl.com/2ulnue

make sure you read this piece from russ winter / ihr solltet zudem diesen link lesen http://tinyurl.com/2to526

The why and how America is in trouble / hall of fame

wow! this is a must read from credit suisse,bill cara and also tanta/calculated risk. make sure you click on the headline to see dozens of charts and data.

donnerwetter. das solltet ihr gelesen haben. die wohl bisher beste zusammenfassung des us hypothekenmarktes. dank geht an bill cara, credit suisse und tanta/calculated risk. bitte auf die überschrift klicken

the 3 ones are only a very small sample to increase your appetite.

die 3 charts sind nur zum neugierig machen.

In the past five years, subprime purchase originations have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. Loans were made to first time homebuyers with little or no down payments, as 2006 subprime purchase originations posted an alarming 94% combined loan-to-value, on an average loan price of nearly $200,000. Even more distressing is the fact that roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes…

after viewing all the charts and data i highly recommend this link from tanta/calculated risk

nachdem ihr die charts gesehen habt solltet ihr diesen link anklicken um noch mehr fakten zu bekommen.

http://calculatedrisk.blogspot.com/2007/03/tanta-credit-suisse-not-drinking-kool.html

Next: The real estate market freeze / fleckenstein

i´m pretty sure that fleckenstein is correct and nobody need to hire "frozone".

denke fleck liegt richtig. die hilfe von "frozone" wird nicht extra benötigt.

As a result of the collapse of the subprime mortgage market, lenders will -- gasp! -- once again require down payments, filling the market with unsold homes and driving down prices.

The unraveling of the housing market, the magic bullet that "fixed" our unraveled equity bubble, is the news. Slowly, the popular press is waking up to what I've been discussing for many months now.

Dropping like subprime flies
Essentially, the subprime mortgage industry -- which lends to consumers with credit issues -- is gone. Alt A lenders, those one rung up the ladder creditwise, will be next. Together, they comprise approximately 40% of the market. If you were to go down the list of what were once the top 25 subprime lenders, you'd see that only a handful are still standing at this point. .....


What we don't yet know is the degree of credit-related insanity, which we'll only discover when the tide goes out -- ..... We also don't yet know the ramifications for the dark-matter universe in collateralized debt obligations (CDOs), credit default swaps (CDSs) and other derivatives-related exotica. But I think it's safe to say that the surprises will be negative -- and large.

This credit collapse is an unequivocally important event. Because, as I've been writing, the ability of anybody with a pulse to get a loan for any amount is what drove the real estate market, and the real estate market is what drove the economy. Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode and prices will eventually drop rather dramatically as a vicious cycle feeds on itself.



The down payment makes a comeback
Since the pendulum swung as far as it could in the direction of reckless lending, which the whole bubble was about, it will now swing back toward the quaint notion of folks being lent only the amount of money they can reasonably be expected to pay back. And, the lenders will want their loans to have a margin of safety, in the form of down payments. ....

In the meantime, patience is required of those of us in that camp. Yes, there have been "fire drills" in the stock market on a handful of days, when folks headed for the exits.
But folks have also headed right back into stocks as soon as they appeared to stabilize. Which just shows you that in the aggregate, folks do not understand that the economy was driven by real estate. Nor do they seem to understand that real estate is what will sink the economy. .....

Crisis Looms in Mortgages / NYT

good summary. too bad that most of the newspaper havn´t done stories like this one in advance. so it is only good reporting but they should have done better ......

when you want more infos please click on the labels at the end of the post. skip the first (this) article and you get older post on the topic

gute zusammenfassung. warum ´die story nicht in den letzten jahren erzählt worden ist muß man die journalisten fragen.

wenn ihr mehr zu den einzelnen punkten lesen wollt bitte am ende des post auf die labels klicken und den ersten (diesen) bericht ignorieren und zum 2. scrollen.

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.

What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago. (looks like this cartoon is proven wrong..../ sieht ganz so aus las wenn dieser cartoon überholt ist.....)

thanks to http://www.wallstreetfollies.com/

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.

Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market. ....

“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” .... “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”

While real estate prices were rising, the market for home loans operated like a well-oiled machine, providing ready money to borrowers and high returns to investors like pension funds, insurance companies, hedge funds and other institutions. Now this enormous and important machine is sputtering, and the effects are reverberating throughout Main Street, Wall Street and Washington.

Already, more than two dozen mortgage lenders have failed or closed their doors, and shares of big companies in the mortgage industry have declined significantly. Delinquencies on loans made to less creditworthy borrowers — known as subprime mortgages —recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well. ....

“I guess we are a bit surprised at how fast this has unraveled!....

Even now the tone accentuates the positive. In a recent presentation to investors, UBS Securities discussed the potential for losses among some mortgage securities in a variety of housing markets. None of the models showed flat or falling home prices, however. ( can you believe this?!?, nicht zu fassen!?!, no wonder ubs also upgraded new century.....)

The Bear Stearns analyst who upgraded New Century, Scott R. Coren, wrote in a research note that the company’s stock price reflected the risks in its industry, and that the downside risk was about $10 in a “rescue-sale scenario.” According to New Century, Bear Stearns is among the firms with a “longstanding” relationship financing its mortgage operation. ....( he is not alone.....)

thnaks to ticker sense http://tickersense.typepad.com/ticker_sense/

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. ( i think the worms may look like this one.../ die würmer sehen wohl aus wie....)

In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.

Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

“How these things are valued for portfolio purposes is exposed to management judgment, which is potentially arbitrary,” Mr. Rosner said.

At the heart of the turmoil is the subprime mortgage market, which developed to give loans to shaky borrowers or to those with little cash to put down as collateral. Some 35 percent of all mortgage securities issued last year were in that category, up from 13 percent in 2003.

Looking to expand their reach and their profits, lenders were far too willing to lend, as evidenced by the creation of new types of mortgages — known as “affordability products” — that required little or no down payment and little or no documentation of a borrower’s income. Loans with 40-year or even 50-year terms were also popular among cash-strapped borrowers seeking low monthly payments. Exceedingly low “teaser” rates that move up rapidly in later years were another feature of the new loans.

The rapid rise in the amount borrowed against a property’s value shows how willing lenders were to stretch. In 2000, according to Banc of America Securities, the average loan to a subprime lender was 48 percent of the value of the underlying property. By 2006, that figure reached 82 percent.

Mortgages requiring little or no documentation became known colloquially as “liar loans.” An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half.

A Deutsche Bank report said liar loans accounted for 40 percent of the subprime mortgage issuance last year, up from 25 percent in 2001.

Securities backed by home mortgages have been traded since the 1970s, but it has been only since 2002 or so that investors, including pension funds, insurance companies, hedge funds and other institutions, have shown such an appetite for them.

Wall Street, of course, was happy to help refashion mortgages from arcane and illiquid securities into ubiquitous and frequently traded ones. Its reward is that it now dominates the market. While commercial banks and savings banks had long been the biggest lenders to home buyers, by 2006, Wall Street had a commanding share — 60 percent — of the mortgage financing market, Federal Reserve data show. .....

The profits from packaging these securities and trading them for customers and their own accounts have been phenomenal.

The issuance of mortgage-related securities, which include those backed by home-equity loans, peaked in 2003 at more than $3 trillion, according to data from the Bond Market Association. Last year’s issuance, reflecting a slowdown in home price appreciation, was $1.93 trillion, a slight decline from 2005.

In addition to enviable growth, the mortgage securities market has undergone other changes in recent years. In the 1990s, buyers of mortgage securities spread out their risk by combining those securities with loans backed by other assets, like credit card receivables and automobile loans. But in 2001, investor preferences changed, focusing on specific types of loans. Mortgages quickly became the favorite.

Another change in the market involves its trading characteristics. Years ago, mortgage-backed securities appealed to a buy-and-hold crowd, ...... “Now it has become much more of a trading market, with a mark-to-market bent.”

The average daily trading volume of mortgage securities issued by government agencies like Fannie Mae and Freddie Mac, for example, exceeded $250 billion last year. That’s up from about $60 billion in 2000.

Wall Street became so enamored of the profits in mortgages that it began to expand its reach, buying companies that make loans to consumers to supplement its packaging and sales operations. In August 2006, Morgan Stanley bought Saxon, a $6.5 billion subprime mortgage underwriter, for $706 million. ( great timing, driving/buying looking in the rear view mirror...../ gutes timing , fahren/kaufen mit tunnelblick in den rückspiegel ist selten gesund......)

And last September, Merrill Lynch paid $1.3 billion to buy First Franklin Financial, a home lender in San Jose, Calif. At the time, Merrill said it expected First Franklin to add to its earnings in 2007. Now analysts expect Merrill to take a large loss on the purchase.....

As prevailing interest rates remained low over the last several years, the appetite for these securities only rose. .... Mortgage securities participants say increasingly lax lending standards in these loans became almost an invitation to commit mortgage fraud. It is too early to tell how significant a role mortgage fraud played in the rocketing delinquency rates — 12.6 percent among subprime borrowers. Delinquency rates among all mortgages stood at 4.7 percent in the third quarter of 2006.



For years, investors cared little about risks in mortgage holdings. That is changing.

“I would not be surprised if between now and the end of the year at least 20 percent of BBB and BBB- bonds that are backed by subprime loans originated in 2006 will be downgraded,” ..

Still, the rating agencies have yet to downgrade large numbers of mortgage securities to reflect the market turmoil. Standard & Poor’s has put 2 percent of the subprime loans it rates on watch for a downgrade, and
Moody’s said it has downgraded 1 percent to 2 percent of