Fundamentals, not liquidity conditions, are behind MBS crash

Good luck to all the banks and especially the monoline insurers that still think that the ABX Indices ( see also The AAA Trap via Sudden Debt ) are not reflecting the market price....... But as long as they can convince the auditors.......

Viel Glück all denen die die immer noch glauben das die ABX Indizes ( siehe auch The AAA Trap von Sudden Debt ) nicht den wahren Wert wiederspiegeln..... Aber solange die Buchprüfer diese Zahlen abnehemen......


Fundamentals, not liquidity conditions, are behind MBS crash / FT
Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:

The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.

Hat tip to Barry Ritholtz who has also more on this topic Financials: Worse than they look?

Dank an Barry Ritholtz der zum Thema ebenfalls treffendes zu sagen hat Financials: Worse than they look?

At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent - with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages - that is, second mortgages on a property, the loss severity rates average 94 per cent.

> By the way MBIA is on the hook if the losses for their RMBS CDO´s are greater than 22-28 percent.........

> Ganz nebenbei bemerkt ist MBIA ab Verlusten von 22-28 % bei Ihren RMBS CDO´s in der Haftung.....

So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher - which means the number of occasions when the above loss severity ratios have to be applied are increasing.

And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004:

According to CreditSights, that should “up-end the idea that the 2004 vintage was perhaps sufficiently seasoned and composed of loans that had enjoyed enough home price appreciation since 2000, to avoid any further erosion.”

As it is, foreclosure rates are hovering at around 13 per cent on 2005 and 2006 mortgage debt. But CreditSights say there is “no end in sight” when it comes to that figure rising.

Consider then the outlook for delinquancy rates - a measure of mortgage loans not yet in foreclosure, but in trouble:

Add the 7 per cent delinquency rate for the 2006 vintage to the 2006 foreclosure rate at 12.6 and it’s already close to 20 per cent.

How then does that translate into the world of structured finance, and those RMBS tranches?

To trigger a default on the most secure subprime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent.

As can be seen from the results of CreditSights’ survey, that scenario is indeed becoming “less and less unthinkable”. Adding the foreclosure and delinquancy rates takes us close to 20 per cent. Both are set to increase. Then there’s those painfully low severity loss ratios. Add it all together and that AAA debt is far, far, far from safe.

And we haven’t even mentioned prime tranches lower down the structure.

Far from mispricing RMBS, CreditSights even go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) are throwing up some pretty appropriate figures.

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..... ?

For Some Subprime Borrowers, Few Good Choices / NYT

not a pretty picture...... and this is only the beginning.

sieht nicht gut aus.....und das ist leider erst der anfang.




....As problems with subprime mortgages have escalated, officials on Wall Street as well as in Washington have urged lenders and the government to step in and cushion the blow to troubled borrowers and find ways to enable them to remain in their homes.

That may not be possible in many cases.....


“There is no way they can keep their homes,”....... “It’s impossible.”

And in an unusual twist, the process of packaging and reselling home loans to investors — known as securitization, which has provided much of the cash that fueled subprime lending — has also made it harder to modify debts that go bad.

At the end of last year, more than 2.6 million home loans were either past due for more than 30 days or in foreclosure. About 40 percent of them were made to people with weak, or subprime, credit. Most economists predict that the number of troubled loans will continue to rise this year as more mortgages are adjusted to higher interest rates and home prices decline further.


Last year, more than 37 percent of subprime loans were made without verification of borrowers’ incomes, up from 15 percent in 2000, according to an analysis by JPMorgan Chase. Also, a third of borrowers took out a second mortgage, up from 6.8 percent in 2003, suggesting that they did not have enough money for a down payment.


For these borrowers, the best alternatives, according to some housing specialists, may include short sales, in which a lender accepts a sale for less than what is owed on the house, or a deed in lieu of foreclosure, where a lender takes ownership of a house instead of full payment of the mortgage.


Rising default rates have thus far had a modest impact on the overall economy, but economists fear that the problems could intensify if a broader range of borrowers, including those with stronger credit, start falling behind on payments. A big increase in the number of homes for sale, because of rising foreclosures, would put more pressure on prices and limit home buying and consumer spending. .....

• and with this scare arm graph it is likely that the foreclosures will increase dramatically / und diese grafik legt nache das die zahle der zwangsversteigerungen sogar dramatisch ansteigen wird...)

größer/bigger http://www.smugmug.com/photos/136440158-O.png

Loss mitigation efforts by mortgage lenders and government subsides, to be clear, can help borrowers and limit losses. But experience thus far suggests that a more concerted and coordinated effort will be needed. It may also require a change in the policies governing what can be done with securitized loans.

To increase a borrower’s chance of making required payments, lenders can do things like lowering interest rates on the loans, waiving past-due payments and fees, and extending the periods in which low teaser rates apply to loans.

But the options vary greatly, based on who owns the mortgages. Generally speaking, loans held by the banks that made them in the first place can be modified most easily. Loans that have been securitized are typically subject to greater restrictions, according to the terms on which they were sold to investors. Payments made by borrowers whose loans have been securitized are collected and processed by mortgage servicers.

According to a Bear Stearns analysis, half of all mortgage securities that make up a widely followed index allow the servicer to modify the interest rate, principal balance or maturity of a loan; 40 percent allow some modifications but require approval from a ratings agency if more than 5 percent of a pool of mortgages is changed, and 10 percent of loan pools allow no changes. About half of all modifications are successful at preventing foreclosures, according to the investment bank. ( this looks very high to me / das sieht mir nach einer sehr hohen qoute aus)

The restrictions are intended to protect investors against tampering with the cash flow generated by the loans. But in times of greater distress, investors prefer modifications that let them continue earning a return rather than having the property foreclosed, a costly process.
“You will see a greater willingness to work with borrowers,” said Gyan Sinha, a senior analyst who follows the subprime market for Bear Stearns.

Much of the revamping will start occurring once investors sell off or write down the value of the loans to account for decreases in home prices and the delinquent status of the loans, said Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California.

Some borrowers may find that they can stay in their homes if the value is written down enough.
“You mark the asset down to current value,” Mr. Ross said, “then you look at the borrower and say, ‘Is this the borrower that will repay me?’ ”


But housing counselors and lawyers who have worked on behalf of borrowers say their experience suggests that is not yet happening.

They say that many servicers are unwilling to discuss modifications until loans are at least three months past due, a point when many borrowers are in deep financial trouble. Also, servicers are often unwilling or unable to make big enough changes to account for inflated appraisals and income levels that were used in underwriting the loans......

Officials at some big mortgage servicers declined to discuss their practices, but an executive at Wells Fargo, ...., says it has taken an active approach.

Consider Andrew D. Sobel, a 48-year-old in San Diego, who took out two mortgages to buy a $240,000 condominium in 2004 and is now facing its sale for $175,000. He could not afford higher monthly payments that took effect in September, when his loan was converted to a variable interest rate. Countrywide, which services his loan, would not agree to modify the loan but was willing to accept the short sale. He could not refinance because the home is worth less than what he owes on the property.



thanks to http://countrywide-foreclosures.blogspot.com/

make sure you click on the link to see the mess in much more detail! bitte auf den link klicken um das ganze ausmaß zu sehen

“There was never any effort to try to keep me in my home,” he said.

More borrowers may find themselves in a similar situation in the next two years as the first interest rate adjustments take effect on loans in 2004 and 2005. Those who continue to have spotty credit and little equity in their homes will be at the greatest risk because many lenders are no longer offering no-money-down mortgages to people with weak credit.

“If someone calls and says they want do a 100 percent loan,” said Jeff Jaye, a mortgage broker in San Jose, Calif., “my antenna goes up. My first question is ‘What’s your credit score?’ ”