Subprime, Alt-A Mortgage Performance Continues To Decline [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Speedier Bank Transfers Sought by Fannie.  “Financial Services Roundtable, a trade group representing financial-services companies: Fannie Mae (FNM) [informed banks] they must remit daily instead of monthly interest and principal payments on mortgage loans that are destined for owners of mortgage-backed securities. Fannie spokesman Brian Faith: The move is prudent and applies only to "certain" banks… Mortgage-bond holders could face losses if the loan payments were stranded at a failed bank. But the move adds administrative costs and reduces interest income at the banks that collect payments on the loans.” (WSJ, Sept. 27)

Subprime, Alt-A Delinquencies Rise in August: Clayton. “Clayton Holdings, Inc.: Performance in recent vintages of both subprime and Alt-A mortgages continued to deteriorate during August… 60+ day delinquencies for both Alt-A and subprime mortgages had increased, while cure rates had decreased; interestingly, however, roll rates — which measure the percentage of loans that worsened in delinquency status — decreased in most areas. For 2006 subprime first liens, the 60+ day delinquency percentage reached 40.24%, a jump of 5.49% from the prior month; for 2007 vintage loans, 30.82% were 60 or more days delinquent, up 6.05%.” (Housing Wire, Sept. 26)

Wamu Flooded Massachusetts With Subprime Mortgages. “Massachusetts was one of Washington Mutual Inc.’s biggest markets for risky subprime mortgages, whose skyrocketing defaults contributed to the failure of the nation’s largest savings and loan. The bank’s option adjustable-rate mortgages in Massachusetts stood at $1.2 billion, or 2% of a total portfolio of $52.9B, at the end of June, U.S. regulatory filings show. Option ARMs are notorious for hitting borrowers with sudden and sharp payment increases. One feature of an option ARM allows borrowers to pick their payment, even at a level that doesn’t cover monthly interest.” (Boston Business Journal, Sept. 26)

                                                                    

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Comments

[flashrob]

a "simple proposal" to alleviate much of the "sub-prime" crisis...

I have noticed that "much of the problem" for the financial institutions is:

1. Real-Estate writedowns sometimes as much as .10 cents on the dollar. This is in turn lowers the bank reserve rates ... resulting in severe financial distress for the institution.

2. This is all based on the "so-called marketable value" of the underlying "assets" (mortgage, etc.)

3. ...and WHO IS WILLING TO PAY "WHAT" ON THE WORLDWIDE MKTS.

4. Now, in our present circumstances THIS LINE OF THINKING IS CLEARLY WRONG!!!

5. My Solution: Screw the "so-called mkt value" of mortgages, cdo's, etc.

I don't know of ANY REAL ESTATE THAT HAS DROPPED MORE THAN 50% during the last few years ... SO WHY ARE BANKS BEING FORCED TO VALUE THEM in some cases at .10 cents on the dollar ... only because their are no BUYERS ON THE OPEN MKTS???

This is STUPID ... if I have a million dollar house (estimate 5 years ago) and IT'S NOW WORTH 500k ... and I could get 500k ...why then is the bank or banks that have traded the "my original mortgage rights" being forced to "asset value it" at 100k ... because NO ONE IN THE WORLD FINANCIAL PAPER MKTS WANTS TO BUY IT ...

SCREW 'EM ... THE VALUE SHOULD BE MAINTAINED ON THE BANK'S BOOKS AT 500K (it's actual marketable resale value) AND NOT 100K because EVERYBODY IN THE "PHONY FINANCIAL PAPER MKT" in a "ILL-LIQUIDITY FEAR PANIC!"

... just because "the only prospective buyers of my house in a given week" only OFFER ME 100K ...

screw 'em ... I'll just wait TO GET MY 500K PRICE ...

and since IT REALLY IS WORTH 500K ... I'LL GET IT ...maybe I just have to wait a few weeks ... TIL "SERIOUS BUYERS" COME IN...

bottom line: ALL BANK REAL-ESTATE MORTAGES SHOULD BE BASED AS ASSET VALUES more in line with their true worth ... like say 50% ... look at the mkt prices on housing that is being sold ... it's even "better than that in most cases!"

Screw the "panicky financial paper SHUFFLERS!"

WHAT ARE THESE "REAL ESTATE MORTGAGE ASSETS REALLY WORTH???

FLASHROB

2008 Sep 29 12:42 PM

[henarl]

flashrob: The buyer of a mortgage doesn't want a house. He wants a note that pays him interest, not a liability (empty house) that costs him taxes, upkeep, utilities, etc. Ending up with the house thru foreclosure is a last resort that will also encumber him with various transaction expenses.
Therefore, to an investor, the value of a mortgage that may have to be foreclosed is not as much as the market value of the underlying property.

2008 Sep 29 02:27 PM

[marine41]

IS THIS WHAT THEY TEACH AT HARVARD AND THE SLOANE BUSINESS MGT MIT

2008 Sep 29 08:34 PM

[billddrummer]

Hi Judy,

Great compilation. Thanks!

To flashrob,

First of all, the investors who purchased the mortgage backed securities weren't interested in the houses at all. All they wanted was yield on their investment, which was represented by the value of the cash stream (interest and principal payments) generated by the underlying notes. As long as people made their payments on time, that cash stream was predictable, measurable, and could be valued. But when mortgage companies began making loans to borrowers who couldn't afford them, default rates spiked. What that did to the markets is twofold: First, the payment streams were less predictable; and second, their market value become questionable because of the subsequent unpredictibility.

That, in my view, is why the credit markets for collateralized debt securities has frozen up.

Adding insult to injury is this: The tranches of mortgages that were bundled and sold were insured with credit default swaps, to protect the investor from default. Those swaps were also sold in the secondary market. And as long as default rates remained low, the swap market stayed liquid--if few people defaulted, then your swap was safe. And many companies pledged the values of the swaps for commercial paper, that was also sold in the secondary market. But as more loans went into default, swap values dropped. The lower swap values forced commercial paper issuers to come up with more collateral to back the outstanding commercial paper. But with the markets frozen, dealers couldn't raise the cash necessary. And you ended up with bankruptcies of Lehman, a fire sale of Wamu, the collapse of Merriill Lynch, and so on.

But that has nothing at all to do with the value of the property. Instead, the markets for the securities created from the mortgages written is what collapsed, mainly because the payment streams couldn't be predicted with as much certainty.

And that's why we're here, in my opinion.

I've said this many times on this forum and others: Until prices for homes reach a level where a local household can afford to purchase, housing prices will continue to fall. This is a local phenomenon, driven by prevailing incomes in the local area. Which is why it's so instructive to read this thread--Judy gets information from all over the world, and presents it to us to provide a macro-view of the real estate markets.

Locally (northern NV), I look for home prices to correct another 15-20%. That would put the median home price at $192,000, which is affordable for a household with the median income for this area. In higher income areas, prices will tend to correct at a higher level. But don't expected outsized appreciation after the median price stops falling. There's still more inventory to absorb before appreciation starts.

2008 Sep 30 01:17 PM