Subprime Mortgage Lessons from the Used Car Lot

When American International Group’s (AIG) former CEO Hank Greenberg said publicly that he was not responsible for the huge write downs of bad assets placed on the books during his reign, I only partially agree. Greenberg’s point was that a company should not just sit on assets when the market changes; assets need to be actively managed. He blames the current management for not hedging.

Subprime loans pay a premium for a specific reason; they require extra care. Here’s where Greenberg and I part company. The care required is not managing the mathematical odds of default rates and recoveries. The extra care required is in nurturing the borrowers with the proper balance between carrots and sticks to keep the loans profitable.

The Impac Mortgage Holdings (IMH) conference call was quite interesting in that regard. Impac went through an excruciating period of consolidation and is starting its rebuilding phase. Investors certainly needed an iron stomach to continue buying when the stock bottomed at 20 cents. Impac said that early buyers of distressed mortgages stood little chance of success because they did not control the servicing rights.

Impac is in the process of purchasing a small servicing platform, before buying any distressed assets. Heavily discounted distressed mortgages are only a good value if they can be reworked into profitable loans. Investors cannot systematically rework loans if they do not control the servicing. As important, investors cannot nurture their borrowers if an independent servicer stands in the way.

The interest of investors and servicers are far from aligned. Countrywide (CFC) has shown that it is far more interested in collecting all kinds fees and penalties than working out distressed mortgages.

The new breed of distressed mortgage funds seems to be the “free market” solution that both Treasury Secretary Paulson and Federal Reserve Chairman Bernanke could feel comfortable with. These funds are buying delinquent mortgages with the intent of borrower workouts. Deeply discounted mortgages can still be profitable with lower payments. Time will tell how successful these new funds will be without controlling the service rights.

Providing financing for used cars in the rural southern states can be just as challenging as providing subprime mortgages. The key difference is there is never any hope for appreciation of a used car. Auto loans are almost always underwater from the start, so dealers are using new technology to track their riskiest customer’s collateral. The Financial Times “American dream boosts used-car dealers” reports the dealers are starting to install a remote operated starter-disabling device to discipline borrowers to pay, and global positioning systems to find vehicles in need of repossession.

While the regulations for managing auto and mortgage debt differ, the mortgage industry can learn from the auto loan industry. Given the inherent high risk of all auto loans, these lenders must be on the cutting edge of managing their customers.

Disclosure: Author is long CFC and IMH.

Comments

[copesetic:]

Pay your mortgage or we shut off your HOUSE?!!!! I can hear the horde of lawyers gathering now :)
Disclosure,respondent is long cfc,but at this moment I can't really explain why!

2008 May 26 11:52 AM

[H2O:]

They Love there threats - If you don't just fall in line - with how they steal - your the ones thats bad - well - The world has always ajusted things out.

The Rich Greedy be warned!!!!

The peace maker shall walk this world - Or the butcher shall - once again rise - to face the rich-greedy - Your Warrior's already have turned - disalusioned by your lies - like the rest of america - and the world - just like - Alexander the Great - The great destroyer - already has his army built - The choice is simple - Peace - or walk your road of war.

For it is by your own hand - does the great destroyer wait - his march across the world.

The French Revolution made the American Revolution look like a day at the park. After centuries of monarchy, feudalism and virtual theocracy, the French threw out virtually every major institution of daily life, with bloody exuberance.

The country became mired in intrigues, as the revolutionaries and the noble class tried to carve out new roles in the new order. After several false starts, the Revolution really got underway in 1792, when the monarchy was decisively ousted. Thousands of royalists were rounded up and jailed; about 2,000 were killed during riots, when angry mobs stormed the jails.

You can lop it off, or chop it off, hack it off, or whack it off, but no matter how you slice it, removing the head of another human being is tedious, messy and difficult.


Guillotine


Although the guillotine's glory days came during the height of the French Revolution, its history hardly ended there. After its initial success in France, the machine was exported to other nations. Although similar devices had already been used throughout Europe, the guillotine proper became very popular in Germany, especially in Nazi Germany, where it was used for tens of thousands of executions during Hitler's tenure.

2008 May 26 01:28 PM

[Rhett:]

Getimg rich off poor people is a pretty sorry business.

2008 May 27 08:12 AM

[trailertras...:]

Why is it these guys can never spell? Apparently the revolution will also do away with literacy.

2008 May 27 12:41 PM

[WAKEUP:]

Ah, yes, it's time for another lesson in the Ways Of The South. So, "...dealers are starting to install a remote operated starter-disabling device to discipline borrowers to pay, and global positioning systems to find vehicles in need of repossession." Won't work. Southern guys are already ripping all that stuff out, and using the parts to rig radios in their cabins at the river, so they can listen to country music while they clean the catfish. Yeah, I know. You think the car won't start, with all that electronic garbage removed. Will, too. There are a large number of tech schools in the South, and it ain't all yankee transplants who graduate from 'em. And speaking of "...the inherent high risk of all auto loans," that risk gets VERY high, back along the banks and coves of rivers and streams, where all those one-lane red clay roads meander. I know. I was a repo man, in the South, for several years. I was shot at (.45 calibre pistol; 12-guage shotgun, .38 and .22 calibre pistols), I lost count of the fights I had with these guys, when I was assaulted, on repossession outings. One of those fights, by the way, was with the preacher of one of the many Baptist churches dotted all over the South. He didn't want his car repossessed, either. Usually, when all of THAT smoke cleared, there was another round of smoke, from the burning car . . But the main reason all this Harvard MBA drivel won't succeed is that local businessmen, yep, the small, very localized used car dealers, will "tote-the-note," themselves, on the cars they sell. And no, the "tote-the-note" guys won't bother with the electronic whizzbang stuff. They know better. Besides, in places where everybody knows everybody, most of the loans eventually get paid off, anyway. Yeah, there are a lot of late fees, refinancing fees, etc., involved, but nobody cares, as long as they get to keep the car until it's time to go back to the lot and talk with Jed, about a trade-in. What's that, you say, none of this applies to the new car dealers? Well, no, but that doesn't matter. New car sales are in the process of falling off to nothing, as you probably know. So, come on down. You can probably join a bunch of fellers heading out to catch some fish, this afternoon. But don't bring that electronic thing with you. It might cause you to get a shock.

2008 May 27 01:35 PM

[H2O:]

Misspoken Words – At least on The Right Side – Unlike some republicans:

Obama’s family was on the right side of liberating the death camps of WWII – Unlike the republican leader – selling IRON – to build the camps.
Warped since of values these repubs have – Just like the War of LIES in IRAQ – It’s okay to blame the troops for winning the war – with the insiders not managing the war right.

The troops have done their JOB – Washington insiders – Need to get off their butts and stop stealing American tax-payer dollars – and get there political situation worked out.

WERE STILL WAITING ON THERE 2 DOLLAR A BARREL OIL – FROM THERE WAR OF LIES – GIVE US LIBERTY – WITH 2 DOLLAR A BARREL OIL – OR GIVE US OUR TROOPS BACK.

HOW DO YOU KNOW WHEN WASHINGTON IS LYING TO YOU? – WHEN A REBUPLICAN OPENS THERE MOUTHS.

2008 May 27 06:37 PM

[ngwun:]

wrog tern did i take?
Alkadier websight?
Sorry, OD on H20... affects brein, um, you evel US... wotever

Strike a light! Try to have a discussion, & out come the revo's. Always a problem when one defines the elements of a set or subset, as homogenous, although it enables indiscriminate assault.
Revolution merely changes the leader, & pretends to change the system.

2008 May 27 08:22 PM