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April 14, 2008

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Interesting chart, but as you mentioned in your post, resets are not the primary driver of defaults, so the fact that there are many mortgages resetting in the next couple of years doesn't necessarily translate to higher defaults, or more importantly, additional writedowns.

Speaking of writedowns, a mortgage trader told me that the Wall St. writedowns include not just subprime, but all mortgage related re-valuations, including Alt-A, prime, home equity lines/HELOCs. That's not to say everything has been written down to a market clearing level, but it suggests that Alt-A and HELOCs are not being held at par or near-par. If this is true, expectations of additional writedowns should center on defaults being higher than currently forecast, rather than on the notion that banks are holding non-subprime mortgage securities at par.

But keep in mind, once pay options reset, they hold a principal balance of 110 to 125% of the original balance. The borrower cant refi or sell unless they bring in tons of cash. They could chose to make the 2 to 3x payment of course. But they won't in many cases for a home with 20-40% negatibe equity.

On the write downs, Wells has taken $1 billion on a $84 billion Home Equity loan/line portfolio. These are selling at 3-5 cents on the dollar. They also hold $25 billion of subprime. No write downs.

We are in the early innings.

i can't wait to see Buffett's indecent proposal to Wells after it takes shudderingly heavy losses on the aforementioned option ARMs and HELOCs. that guy comes up w/ some creative (albeit insulting, but hey that's the market) offers.

I also got an analysis for typical OA package from 05-07. The one I displayed is from CFC and you guys can see where to look for red flags based on that example.

WB is kinda tricky, they portfolioed their stuffs so there isn't much data about their OA loans.

But as u said yes it will be just another cut that looks like this, perhaps with better LTV cuz Golden Gate is historically more decent (but I dont think it matters this time given the crash CA is gonna get, like 30-50% HPA drop).

http://mtgspy.blogspot.com/2008/04/typical-option-arms-from-bubble-days.html

youy option arm analysis into MBS of their competitors will hold true with their portfolio loans to a great degree. Remember, although WB was tougher on appraisals/ltv and forced a higher minumum monthly payment, they were much easier on credit standards. Six of one, half dozen of another. Not all options arms were created equally, but the consumer behavior towards negative equity with no way out is all created equally.

I must appreciate your work. from last couple of days i was searching for something interesting and this post is really nice.

Thanks for this nice post.

John
http://www.perfectmortgagelender.com/

It's amazing how stupid some of these banks are when their investors are literally strangling them to find a way to increase value. The acquisition of Golden West will go down as one of the all-time worst acquisitions EVER....not because Golden West wasn't run well, but because the timing of the purchase could not have been any worse. And there were plenty of financial pundits out there saying "Wachovia, what the hell are you doing???" and Wachovia said something like "Oh, Golden West has been doing this a long time, and we bought it at a good price, so everything will be just fine, you little peasants....take a seat and learn from the masters here." And now they have to slink back to the investment community and say "Well, in hindsight it doesn't look too good..."

At the same time, when the old guy and his wife sold Golden West, I thought "Now there's a guy who knows how to build his own retirement fund!" Same thing with Sam Zell selling Equity Office Properties, and Blackstone actually flipping some of those commercial buildings to Macklowe who was left holding the bag.

Mr. Mortgage, I've been waiting for someone like you to start a blog like this for over a year...a mortgage insider who knows how bad the situation really is, and can speak intelligently about the problems we face now and in the coming years. I've been reading real estate blogs like crazy and learning how all these mortgage products work, but most blogs cannot speak about the issues intelligently enough. Good work here!

thanks Chris...I appreciate the support. Help me out with ideas on subjects you want to hear about.

Thanks for sharing your time and information with us! It was a brilliant reading! Thank you. Tomas vaalue.com

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