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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: daffodil who wrote (25534)11/30/2004 7:21:22 PM
From: mishedloRead Replies (4) of 306849
 
Scenario 1: I borrow $600,000 from Countrywide, with a 10% down payment. Does Countrywide keep the mortgage or do they sell it? If so, to whom? How many of their mortgages do they continue to hold? In other words, who holds the bag when I default and my home is worth less than the purchase price minus the down payment?

If it is a variable rate mortgage and the persons credit is good, they keep the loan. (The risk of interest rate movement is 100% on the borrower)

If it is not variable rate loan they immediately sell the damn thing to FNM. FNM has to manage the interest rate risk. This forces some peculiarities on FNM. When treasury yields fall and there are lots of refis, FNM compounds the problem by being forced to buy treasuries AFTER a huge rally. When treasury yields soar FNM has to sell treasuries on the assumption that there will be fewer refis and that they can hold the mortgages forever. Thus FNM is constantly buying treasuries HIGH and selling them LOW. FMN would do far better in a trending env rather than these treasury whipsaws we have seen.

With these treasury whipsaws I am positive FNM has lost their ass. Nonetheless everytime treasury yields fall FNM rises in price, even though it means more turnover cost to FNM. Is this a joke or what? Most people have no clue WTF is going on here. No wonder FNM does not want to disclose their books.

On a side note I am positive the reason Greenspan recommended Variable rate loans back in January was not really to screw joe 6pack but to protect FNM from a derrivative meltdown.

I believe my answer applies equally well to all 3 of your questions.

Mish
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