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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (45055)	11/8/2005 12:22:38 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

What am I missing?> The timeline, prepayments only slowed significantly in October, were running amok in the July-August period especially. July was another mini-boomlet. I've posted the MBAA data showing this several times, pay attention class.

To: mishedlo who wrote (45055)	11/8/2005 12:23:16 PM
From: CalculatedRisk	Respond to of 110194

I think speeds picked up in the third quarter: "Over the last three months, net supply has increased as borrowers refinanced from seasoned hybrid and fully indexed adjustable-rate mortgages to fixed-rate paper." But going forward, speeds are expected to slow down: "Analysts' expectations for November's prepayment speeds are for a 15 percent decrease from October. The slowing is due to a slowdown in housing turnover, lower refinancing activity and a two-day drop in collection days." US mortgage bond prepayments fell in October today.reuters.com

To: mishedlo who wrote (45055)	11/8/2005 12:25:28 PM
From: CalculatedRisk	Read Replies (1) \| Respond to of 110194

What is funny is Saxxon saw "unfavorable market conditions" because of "accelerated prepayment speeds" in the 3rd quarter ... and they will probably see unfavorable market conditions because of dropping volumes in the fourth! They can't win ...

To: mishedlo who wrote (45055)	11/8/2005 12:26:06 PM
From: loantech	Respond to of 110194

Hi mish, I am on the lower level employment in mortgage baking. I am not up to speed on some of these issues. I can tell you that people are borrowing way over their heads IMHO only of course. tom

To: mishedlo who wrote (45055)	11/8/2005 12:47:49 PM
From: russwinter	Respond to of 110194

Beside the obvious margin squeeze they endure, we see the following under owned portfolio "seriously" delinquent: March, 05: 5.7% June 05: 6.0% Sept 05: 6.4% But in typical Risklove fashion they creep down on the credit quality on new loans, taking more risk not less: June, 05 618 Sept, 05 613 My fav though, Saxon increased its provision for mortgage loan losses to $19.4 million, which includes a $6.8 million reserve related to Hurricane Katrina. That's against a $6.3 billion portfolio.

To: mishedlo who wrote (45055)	11/8/2005 6:39:24 PM
From: Ramsey Su	Read Replies (1) \| Respond to of 110194

Prepayment is an issue that is overlooked right now especially in the subprime arena. It is something that the system has not experienced before. To illustrate, let me start with a fairly typical subprime loan. For a 620ish FICO borrower, an 80-90% LTV 2/28 loan will start at 6-7% range today. The borrower should expect to pay about a point + garbage processing fees. The reset, at the end of the first 2 years, would be something like 6+ LIBOR which will take it above 10 at today's rates. Most of these loans will have PREPAYMENT PENALTY over the first two years. What we already knew for the yr or so ending with the June 05 quarter, the subprime lenders had been able to churn their borrowers because property value were appreciating. We knew they were not only collecting a new set of fees and points, they were also collecting a prepayment penalty on top. In theory, these loans are for repenting borrowers to buy themselves a couple years. They should clean up their credit during this time and refinance at the end of the two years via a lower rate conforming loan. This should be the reason why all the subprime loans be prepaid before the end of the first two years, not for the sake of taking out more equity but rather to avoid the nasty resets right around the corner. In reality, there are going to be a number of deadbeats who did not raise their FICO scores during this period and will be in for one big reset in the next few months. e.g. let say someone took out one of these 2/28 18 months ago, they probably had an initial rate of around 5 to 5.25% with 30 yr amortized or IO payments. As mentioned above, this could reset at over 10%, a full DOUBLE. These borrowers obviously have the option of refinancing into a new 2/28. However, the initial interst rate is probably up a full percent. Furthermore, if the property has not appreciated enough and they have already maxed out their LTV, then they would have to come out of pocket to pay for fees, points and possibly deficiencies. As you can see, prepay used to be fantastic but now they spell trouble in many ways for the subprime lenders. If prepay is too fast, then they may have problems with loan production. If prepay is too slow, they may be looking at a huge jump in their weighted average coupon but would they be looking at a corresponding jump in defaults? Of course they already know that answer because they know how financially stressed their borrowers are, especially those who cannot refi out of this reset.