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To: aknahow who wrote (13216)	6/29/2003 7:18:55 PM
From: russwinter	Read Replies (1) \| Respond to of 39344

<if you think the entire loans are not sold and then packaged for resale either as pass thrus, or parts of CMOs'> That's what I think exactly. Not all mortgage loans are securitized, and even those that are, are often held in the portfolios of banks, and other lending institutions , and I challenge you to prove otherwise. <Tell me about the book about Long Term capital.Did you read it?> I most certainly did read it, and for the record I read all the books I post links to. I consider this one essential for anyone seeking an understanding of derivatives. Did LTCM make unhedged bets? Not that especially banged them. Complicated hedges? Perhaps, but mainly they lost because the "bell curve" two standard deviations from the norm that they used in their models turned out to be flawed. I would suggest that's not too uncommon either. A lot of the data that goes into today's interest modelling is based on thirteen consecutive interest rate cuts, and a bond market bubble of historic proportions. Is that a normal bell curve? The chances for plenty of static and hokem in these black box models could be quite substantial as a result. I would cite just one example that you mentioned in your previous post: the use of "similar" securities for duration hedging. I'll just challenge the very heart of that assumption, and ask why an agency mortgaged backed security and a treasury should be characteristized as similar? What if liquidity dried up for the former, because of a small change in perception?

To: aknahow who wrote (13216)	6/29/2003 7:34:50 PM
From: LLCF	Read Replies (1) \| Respond to of 39344

<Institutions making or writing adjustable rate mortgages take a smaller interest rate risk but a larger default risk.> Question and comment: 1.) Why is default risk greater with ARM? Comment: The i rate risk associated with a fixed rate mortgage is much larger and harder to hedge than most realize. These loans have 'put options' granted with them as part of the contract... ie. the lender is "short a put" termed 'pre-payment risk' in the media. This means that you can't just to some vanilla swap or hedge buy shorting a 30 year bond against it. You have 'negative convexivity' or are "short a straddle" and must use 'dynamic hedging'* if you can't cover the position with other options [reason FNM tries to float so much callable paper... then THEY own a 'call' covering lots of negative convexivity]. FNM and FRE DO NOT TELL ANYONE what they're position in the premium market is as far as I know... meaning they dont' divulge the extent of their negative convexivity and need for dynamic hedging. FRE's CFO made comments last year about concerns about liquidity in the fixed income market if things got out of hand due to the need for GSE's for dynamic hedging. This is the ONLY thing I ever say mentioned by any of the GSE's on the topic. BTW, the GSE's FNM and FRE alone have a Trillion in retained mortgages I believe, and another Trillion of stuff they've sold BUT retained the default risk if I'm not mistaken???? * dynamic hedging = selling or buying as the market moves to stay hedged... symptamatic of being short premium or otherwise needing to adjust positions as markets move. Example is Wells Fargo's "portfolio insurance" [a gross misnomer btw, there was no insurance] scheme which exacerbated the '87 crash. Thinking that dynamic hedging is 'insurance' is equivalent to thinking you don't need earthquake insurance because you live next door to a stone mason <NFG>. DAK

To: aknahow who wrote (13216)	6/29/2003 7:41:10 PM
From: russwinter	Read Replies (1) \| Respond to of 39344

Current assets of aggressive mortgage packager CFC shows large retained portfolio holdings. See "loans held for investment" and "investments in other financial instruments". biz.yahoo.com Countrywide Financial Corporation CONSOLIDATED BALANCE SHEETS (unaudited) (Dollar amounts in thousands, March 31, December 31, except share data) 2003 2002 Assets Cash $446,306 $697,457 Mortgage loans and mortgage-backed securities held for sale 27,392,295 15,025,617 Trading securities, at market value 4,389,899 5,983,841 Trading securities pledged as collateral, at market value 4,839,258 2,708,879 Securities purchased under agreements to resell 5,181,001 5,997,368 Mortgage servicing rights, net 5,345,675 5,384,933 Investments in other financial instruments 13,683,689 10,901,915 Loans held for investment, net 7,774,844 6,070,426 Property, equipment and leasehold improvements, net 628,737 576,688 Other assets 3,929,321 4,683,659 Total assets $73,611,025 $58,030,783