But changing to the matter of the sub-prime loan markets, I have a question. If I'm not mistaken, those loans represent the down payments that are normally paid cash by the home buyer. So, it begs the question.. considering that most of these homes were purchased by lower middle class (and maybe middle class) individuals, the only value on those homes that currently is at risk are the 10-20% of the home value those loans covered. Is is fair to say that 80% of the home that is covered by the primary mortgage will be covered by Mortgage insurance typically associated with such loans?
Secondly, if those sub-prime loans are now practically worthless, is it not incumbent upon those primary mortgage lenders to re-purchase those obligations and renegotiate the terms with the mortgage borrower?
Finally, those sub-prime loans were securitized and resold to the public markets. If those loans were not as sound as they were presented to be to those re-purchasers, do we not have a situation where fraud can be alledged against the mortgage lenders, both sub and prime?
hi hawk....
a couple of quick points ...
first of all i believe from what i have read that the majority of loans in the subprime market were nowhere near the lending practices that required 10 to 20% downpayment....a majority were done with very little or no money downpayment (the intent of course was to refinance before the interest rate reset letting the RE appreciate it's way into 'equity')
so essentially what you have here are 100% finance deals with many of the homes below the finance amount, thus prohibiting any re-fi.....this is setting off a wave of defaults as the borrowers housepayments rocket
additionally, as far as PMI goes, my understanding is that a large number of the mortgages were done as 'piggy-back' loans, meaning a secondary loan to 'create' the downpayment (the intent of which was to avoid PMI)....again you are back to the 100% finance scenario
and yes these mortgage instruments were sold off, but the holders of the mortgages also have a 'call' provision.....this is what is happening to New Century, as the default rates are rising, the investment banks that bought the loans are demanding that they (New Century) buy back the loans...New Century doesn't have the money.....in the end (barring a 'white knight' for NEW) SOMEBODY pays for the losses, since, as the old saying states "you can't squeeze blood out of a turnip" (the turnip being NEW) the investment banks will be holding the bag
this link has an excellent graphic (a picture is worth a thousand words):
ocregister.com
finally, yes there will be fraud investigations, some folks may go to jail depending on what the investigations turn up
there's a lot of talk right now about market 'over-reaction" to the subprime debacle, but frankly i believe that the mortgage defaults are going to spread to the prime market and Alt-A (there's a lot of info on this on the RE thread if you are interested), so i think these defaults are just in the first few innings....end of spring selling season should tell a lot more about how deep and wide the defaults will be
online.wsj.com
Mortgage Hot Potatoes
Banks Try to Return
High-Risk Loans
To the Originators
By CARRICK MOLLENKAMP, JAMES R. HAGERTY and RUTH SIMON
February 15, 2007; Page A4
Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry.
As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.
Merrill demanded in December that ResMae Mortgage Corp. -- which in 2006 sold it $3.5 billion in subprime mortgage loans, or loans to borrowers with poor credit records -- buy back $308 million of loans whose borrowers had defaulted. In a filing this week for bankruptcy law protection, ResMae said those demands "crippled" its operations. The Brea, Calif., company said that repurchase requests were "severe and unexpected."
As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies.
In 2005 and 2006, banks such as HSBC and brokerage firms like Merrill Lynch went on a buying spree, snapping up subprime loans from typically small mortgage banks that had lent money to homebuyers. At the same time, many lenders were loosening their credit standards and making riskier loans.
HSBC kept many of the loans, while Wall Street firms chopped the loans into pools sold to investors as mortgage-backed securities.
In recent months, as home-price appreciation fell and borrowers faced rising interest rates, more people defaulted on their mortgages. That prompted Merrill Lynch and others to exercise their contractual right to demand the sellers buy back the loans. Under mortgage contracts, mortgage originators must often repurchase loans that default very early in their term or that come with underwriting mistakes, such as flawed property appraisals.
"Following early payment defaults, we exercised our contractual rights to return loans to ResMae and protect our financial interests," a Merrill spokesman said. HSBC declined to comment. J.P. Morgan declined to comment.
Yesterday Accredited Home Lenders Holding Co., a subprime mortgage lender based in San Diego, reported a loss of $37.8 million for the fourth quarter, partly due to heavy repurchases of dud loans from large loan buyers, compared with a year-earlier net income of $43.3 million.
Accredited uses credit lines from eight financial institutions to fund its mortgage lending. Those lines of credit contain covenants that could allow the lenders to demand prepayment of the outstanding balance if Accredited has two consecutive quarters of losses, the company said.
Accredited already has received waivers in some cases on those covenants and will need to seek more waivers from the lenders if the company remains in the red during the current quarter, it said.
Investment-banking firms and investment firms that bought mortgage-backed securities are hiring firms to scrutinize subprime portfolios for loans that violate contracts.
Clayton Holdings Inc. is working with a half-dozen investment-banking firms to identify loans that should be repurchased. Clayton has also been hired by two hedge funds to review mortgage bonds they own for potential repurchases.
"Nobody was doing this in earnest before late last year," says Kevin Kanouff, president of Clayton Fixed Income Services, adding that he expects the volume of putbacks "to trail off in the third or fourth quarter. The carnage that you are seeing...is not over."
In a push to recoup losses, HSBC, which last week added $1.76 billion to its bad-debt costs for 2006 to cover ailing mortgages, has sued several small lenders in federal court in Illinois after they refused HSBC's repurchase requests.
Credit Suisse analyst Rod Dubitsky said he expects repurchases to continue to rise for the next six months.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com, James R. Hagerty at bob.hagerty@wsj.com and Ruth Simon at ruth.simon@wsj.com |
