Josh Rosner of Graham, Fisher didn’t predict the collapse of the housing market. He did something more perceptive than that. Back in 2001 (2001!) he identified the changes in the housing market that would lead to the collapse and warned of the possibility. He called his analysis “Housing in the New Millenium: A Home Without Equity is Just A Rental With Debt.” He saw things no one else at the time saw and he understood the implications. You should be able to find his paper here or here. From the summary:
This report assesses the prospects of the U.S. housing/mortgage sector over the next several years. Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector. Specifically, it appears that a large portion of the housing sector’s growth in the 1990’s came from the easing of the credit underwriting process. Such easing includes:
• The drastic reduction of minimum down payment levels from 20% to 0%
• A focused effort to target the “low income” borrower
• The reduction in private mortgage insurance requirements on high loan to value mortgages
• The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as ‘current’
• Changes in the appraisal process which has led to widespread over-appraisal/over-valuation problems
If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated. Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.
If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses. These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home.
Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can’t be ignored. Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector. In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans. Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.
Rosner recently wrote an analysis of the state of the securitization market. It is superb. He argues that it is crucial to re-establish the securitization market. I disagree. But that doesn’t matter. What does matter is his superb analysis of the Dodd-Frank bill. First, he appears to have read it. Second, he shows how much the legislation relies on government agencies implementing the goals of the legislation. Third, he understands that that is not ideal. Fourth, he shows how even if the legislation is implemented according to its intentions, there are still lots of problems. It’s the best analysis I have read of the current state of the market and the likely impact of the financial reform legislation. A must read.
View Comments
Share
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Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multi-billion-dollar disaster, not just a set of minor paperwork headaches.
So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill.
JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of "process-oriented problems that can be fixed." That puts them in the rosy optimist camp for this crisis, and they're projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years.
But take a look at the analysts' methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.
JPMorgan's analysts look at about $6 trillion in mortgages issued between 2005 and 2007—this is the height of the bubble, but it excludes plenty of lousy loans issued in 2003, 2004 and 2008. They then estimate defaults of $2 trillion and losses of $1.1 trillion on those defaults.
So far, these estimates are reasonable. According to Valparaiso University Law School Professor Alan White, banks lose about 58 percent of the value of a subprime loan at foreclosure. JPMorgan is estimating 55 percent. The notion that one-third of mortgages issued at the height of the bubble will default may seem extreme, but the analysis includes both first-lien mortgages and second-lien mortgages (home equity loans). For houses with multiple mortgages, there's going to be a double-hit when the first lien goes bad. Right now, the official statistics from Mortgage Bankers Association indicate that 14 percent of first mortgages are delinquent or in foreclosure. The longer unemployment stays near 10 percent, the higher that figure will go.
Things don't get out of control until JPMorgan's analysts start deploying their assumptions. First, they assume that Fannie and Freddie will attempt to sack banks with losses from 25 percent of the defaults they see. Of those 25 percent, they assume Fannie and Freddie will successfully force banks to eat losses on 40 percent, leading to total losses of 10 percent. Why 25 percent? Why 40 percent? The analysts don't say. JPMorgan expects private-sector investors to be able to saddle banks with just 5 percent of foreclosure losses, citing a host of technical legal hurdles that make it hard for investors to have their cases heard in court.
So JPMorgan's loss projections are nothing more than a guess—and a low-ball guess at that. JPMorgan is assuming that only five to 10 percent of looming foreclosure losses will actually hit big banks. Change that assumption—20 percent, 60 percent, 80 percent—and things get far worse for Wall Street than JPMorgan's "worst-case" scenario predicts.
Let's consider the exposures of a single bank to put things in context, and let's pick Bank of America, since analysts seem to agree that BofA has the most to worry about right now. They were a big issuer of mortgages themselves, but they also purchased the notoriously predatory Countrywide Financial and also picked up securitization behemoth Merrill Lynch in 2008, giving them far more problems (hilariously, BofA actually paid cash to acquire these balance-sheet-busters).
The most dire estimates for losses on Fannie and Freddie loans at BofA have come from Christopher Whalen at Institutional Risk Analytics and Branch Hill Capital. Whalen has estimated $50 billion in Fannie and Freddie losses for the megabank, while Branch Hill has estimated $70 billion.
The trick is, BofA has $2.1 trillion in total exposure to Fannie and Freddie, according to Whalen. That means even Branch Hill's massive loss projection only amounts to a loss rate of about 3.5 percent.
As of July 2010, Fannie Mae had a serious delinquency rate of 4.82 percent—these are loans where families have missed at least three payments, but haven't been evicted. For Freddie Mac, the number is 3.83 percent. Not all of those losses can be pushed back on the banks, but those numbers will go up as the unemployment rate stays high. Tip the scales just a few percentage points and it's easy to envision catastrophic losses for banks.
But there's reason to believe that Bank of America is in even worse shape with regard to Fannie and Freddie than any of its peers. Countrywide was the single largest provider of loans to Fannie Mae during the housing bubble. Literally 28 percent of the loans Fannie Mae bought up in 2007 came from Countrywide. Fannie even featured a full-page, smiling photograph of Countrywide CEO Angelo Mozilo in their 2003 Annual Report (.pdf, see page 16).
It's much easier for banks to lose money on bad loans they sold to the GSEs than it is for them to lose money on securities they sold to purely private-sector investors. The fact that Bank of America's most notorious wing was the top provider to Fannie Mae during the peak years of the housing bubble does not bode well for the bank's balance sheet.
But this is just exposure to Fannie and Freddie. The private sector is angry about all kinds of things—from wronged borrowers to deceived investors. Investors are already organizing against both mortgage servicers—for improperly handling troubled loans—and against investment banks—for selling them garbage. They aren't just angry about fraudulent foreclosures—evidence is mounting that mortgage servicers can't even handle the profits from mortgages correctly, and aren't sending investors reliable, verifiable payments.
Yesterday investors sent a letter pressuring Countrywide's servicing arm to push losses from bad mortgage bonds back on the bank that sold them. Legally, it's a complicated maneuver, since Countrywide itself issued those bonds—but that just shows the multiple levels at which megabanks like BofA are exposed to fraud losses. Their original sale of mortgages to borrowers, the packaging of those mortgages into securities, the handling of payments and foreclosures, and the accounting for all of these activities—all of this is about to be subjected to serious fraud examinations by people who are trying to make money.
Up until yesterday, big banks thought they had a get-out-of-jail free card on investor lawsuits. Investors have to bring together 25 percent of the buyers of any mortgage bond in order to sue the bank that issued it—even if the actual lawsuit is an open-and-shut fraud case. Investors had not been cooperating. But yesterday's letter to Countrywide is a big deal—even though it's not (yet) a lawsuit, some of the biggest names in finance were going after Countrywide's cash: BlackRock, PIMCO and even the New York Federal Reserve.
Bill Frey, who runs the hedge fund Greenwich Capital, has organized a massive clearinghouse of mortgage investors for the express purpose of bringing lawsuits against big banks that issued bogus mortgage-backed securities. He told me this afternoon that he's about to move: In the next couple of weeks Greenwich and other investors will bring big lawsuits against major banks.
Will these combined troubles be enough to sink any big banks? If investors can win a couple of lawsuits, easily.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
Josh Rosner of Graham, Fisher didn’t predict the collapse of the housing market. He did something more perceptive than that. Back in 2001 (2001!) he identified the changes in the housing market that would lead to the collapse and warned of the possibility. He called his analysis “Housing in the New Millenium: A Home Without Equity is Just A Rental With Debt.” He saw things no one else at the time saw and he understood the implications. You should be able to find his paper here or here. From the summary:
This report assesses the prospects of the U.S. housing/mortgage sector over the next several years. Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector. Specifically, it appears that a large portion of the housing sector’s growth in the 1990’s came from the easing of the credit underwriting process. Such easing includes:
• The drastic reduction of minimum down payment levels from 20% to 0%
• A focused effort to target the “low income” borrower
• The reduction in private mortgage insurance requirements on high loan to value mortgages
• The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as ‘current’
• Changes in the appraisal process which has led to widespread over-appraisal/over-valuation problems
If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated. Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.
If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses. These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home.
Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can’t be ignored. Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector. In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans. Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.
Rosner recently wrote an analysis of the state of the securitization market. It is superb. He argues that it is crucial to re-establish the securitization market. I disagree. But that doesn’t matter. What does matter is his superb analysis of the Dodd-Frank bill. First, he appears to have read it. Second, he shows how much the legislation relies on government agencies implementing the goals of the legislation. Third, he understands that that is not ideal. Fourth, he shows how even if the legislation is implemented according to its intentions, there are still lots of problems. It’s the best analysis I have read of the current state of the market and the likely impact of the financial reform legislation. A must read.
View Comments
Share
Print
Email
Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multi-billion-dollar disaster, not just a set of minor paperwork headaches.
So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill.
JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of "process-oriented problems that can be fixed." That puts them in the rosy optimist camp for this crisis, and they're projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years.
But take a look at the analysts' methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.
JPMorgan's analysts look at about $6 trillion in mortgages issued between 2005 and 2007—this is the height of the bubble, but it excludes plenty of lousy loans issued in 2003, 2004 and 2008. They then estimate defaults of $2 trillion and losses of $1.1 trillion on those defaults.
So far, these estimates are reasonable. According to Valparaiso University Law School Professor Alan White, banks lose about 58 percent of the value of a subprime loan at foreclosure. JPMorgan is estimating 55 percent. The notion that one-third of mortgages issued at the height of the bubble will default may seem extreme, but the analysis includes both first-lien mortgages and second-lien mortgages (home equity loans). For houses with multiple mortgages, there's going to be a double-hit when the first lien goes bad. Right now, the official statistics from Mortgage Bankers Association indicate that 14 percent of first mortgages are delinquent or in foreclosure. The longer unemployment stays near 10 percent, the higher that figure will go.
Things don't get out of control until JPMorgan's analysts start deploying their assumptions. First, they assume that Fannie and Freddie will attempt to sack banks with losses from 25 percent of the defaults they see. Of those 25 percent, they assume Fannie and Freddie will successfully force banks to eat losses on 40 percent, leading to total losses of 10 percent. Why 25 percent? Why 40 percent? The analysts don't say. JPMorgan expects private-sector investors to be able to saddle banks with just 5 percent of foreclosure losses, citing a host of technical legal hurdles that make it hard for investors to have their cases heard in court.
So JPMorgan's loss projections are nothing more than a guess—and a low-ball guess at that. JPMorgan is assuming that only five to 10 percent of looming foreclosure losses will actually hit big banks. Change that assumption—20 percent, 60 percent, 80 percent—and things get far worse for Wall Street than JPMorgan's "worst-case" scenario predicts.
Let's consider the exposures of a single bank to put things in context, and let's pick Bank of America, since analysts seem to agree that BofA has the most to worry about right now. They were a big issuer of mortgages themselves, but they also purchased the notoriously predatory Countrywide Financial and also picked up securitization behemoth Merrill Lynch in 2008, giving them far more problems (hilariously, BofA actually paid cash to acquire these balance-sheet-busters).
The most dire estimates for losses on Fannie and Freddie loans at BofA have come from Christopher Whalen at Institutional Risk Analytics and Branch Hill Capital. Whalen has estimated $50 billion in Fannie and Freddie losses for the megabank, while Branch Hill has estimated $70 billion.
The trick is, BofA has $2.1 trillion in total exposure to Fannie and Freddie, according to Whalen. That means even Branch Hill's massive loss projection only amounts to a loss rate of about 3.5 percent.
As of July 2010, Fannie Mae had a serious delinquency rate of 4.82 percent—these are loans where families have missed at least three payments, but haven't been evicted. For Freddie Mac, the number is 3.83 percent. Not all of those losses can be pushed back on the banks, but those numbers will go up as the unemployment rate stays high. Tip the scales just a few percentage points and it's easy to envision catastrophic losses for banks.
But there's reason to believe that Bank of America is in even worse shape with regard to Fannie and Freddie than any of its peers. Countrywide was the single largest provider of loans to Fannie Mae during the housing bubble. Literally 28 percent of the loans Fannie Mae bought up in 2007 came from Countrywide. Fannie even featured a full-page, smiling photograph of Countrywide CEO Angelo Mozilo in their 2003 Annual Report (.pdf, see page 16).
It's much easier for banks to lose money on bad loans they sold to the GSEs than it is for them to lose money on securities they sold to purely private-sector investors. The fact that Bank of America's most notorious wing was the top provider to Fannie Mae during the peak years of the housing bubble does not bode well for the bank's balance sheet.
But this is just exposure to Fannie and Freddie. The private sector is angry about all kinds of things—from wronged borrowers to deceived investors. Investors are already organizing against both mortgage servicers—for improperly handling troubled loans—and against investment banks—for selling them garbage. They aren't just angry about fraudulent foreclosures—evidence is mounting that mortgage servicers can't even handle the profits from mortgages correctly, and aren't sending investors reliable, verifiable payments.
Yesterday investors sent a letter pressuring Countrywide's servicing arm to push losses from bad mortgage bonds back on the bank that sold them. Legally, it's a complicated maneuver, since Countrywide itself issued those bonds—but that just shows the multiple levels at which megabanks like BofA are exposed to fraud losses. Their original sale of mortgages to borrowers, the packaging of those mortgages into securities, the handling of payments and foreclosures, and the accounting for all of these activities—all of this is about to be subjected to serious fraud examinations by people who are trying to make money.
Up until yesterday, big banks thought they had a get-out-of-jail free card on investor lawsuits. Investors have to bring together 25 percent of the buyers of any mortgage bond in order to sue the bank that issued it—even if the actual lawsuit is an open-and-shut fraud case. Investors had not been cooperating. But yesterday's letter to Countrywide is a big deal—even though it's not (yet) a lawsuit, some of the biggest names in finance were going after Countrywide's cash: BlackRock, PIMCO and even the New York Federal Reserve.
Bill Frey, who runs the hedge fund Greenwich Capital, has organized a massive clearinghouse of mortgage investors for the express purpose of bringing lawsuits against big banks that issued bogus mortgage-backed securities. He told me this afternoon that he's about to move: In the next couple of weeks Greenwich and other investors will bring big lawsuits against major banks.
Will these combined troubles be enough to sink any big banks? If investors can win a couple of lawsuits, easily.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
eric seiger
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
Josh Rosner of Graham, Fisher didn’t predict the collapse of the housing market. He did something more perceptive than that. Back in 2001 (2001!) he identified the changes in the housing market that would lead to the collapse and warned of the possibility. He called his analysis “Housing in the New Millenium: A Home Without Equity is Just A Rental With Debt.” He saw things no one else at the time saw and he understood the implications. You should be able to find his paper here or here. From the summary:
This report assesses the prospects of the U.S. housing/mortgage sector over the next several years. Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector. Specifically, it appears that a large portion of the housing sector’s growth in the 1990’s came from the easing of the credit underwriting process. Such easing includes:
• The drastic reduction of minimum down payment levels from 20% to 0%
• A focused effort to target the “low income” borrower
• The reduction in private mortgage insurance requirements on high loan to value mortgages
• The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as ‘current’
• Changes in the appraisal process which has led to widespread over-appraisal/over-valuation problems
If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated. Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.
If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses. These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home.
Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can’t be ignored. Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector. In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans. Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.
Rosner recently wrote an analysis of the state of the securitization market. It is superb. He argues that it is crucial to re-establish the securitization market. I disagree. But that doesn’t matter. What does matter is his superb analysis of the Dodd-Frank bill. First, he appears to have read it. Second, he shows how much the legislation relies on government agencies implementing the goals of the legislation. Third, he understands that that is not ideal. Fourth, he shows how even if the legislation is implemented according to its intentions, there are still lots of problems. It’s the best analysis I have read of the current state of the market and the likely impact of the financial reform legislation. A must read.
View Comments
Share
Print
Email
Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multi-billion-dollar disaster, not just a set of minor paperwork headaches.
So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill.
JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of "process-oriented problems that can be fixed." That puts them in the rosy optimist camp for this crisis, and they're projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years.
But take a look at the analysts' methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.
JPMorgan's analysts look at about $6 trillion in mortgages issued between 2005 and 2007—this is the height of the bubble, but it excludes plenty of lousy loans issued in 2003, 2004 and 2008. They then estimate defaults of $2 trillion and losses of $1.1 trillion on those defaults.
So far, these estimates are reasonable. According to Valparaiso University Law School Professor Alan White, banks lose about 58 percent of the value of a subprime loan at foreclosure. JPMorgan is estimating 55 percent. The notion that one-third of mortgages issued at the height of the bubble will default may seem extreme, but the analysis includes both first-lien mortgages and second-lien mortgages (home equity loans). For houses with multiple mortgages, there's going to be a double-hit when the first lien goes bad. Right now, the official statistics from Mortgage Bankers Association indicate that 14 percent of first mortgages are delinquent or in foreclosure. The longer unemployment stays near 10 percent, the higher that figure will go.
Things don't get out of control until JPMorgan's analysts start deploying their assumptions. First, they assume that Fannie and Freddie will attempt to sack banks with losses from 25 percent of the defaults they see. Of those 25 percent, they assume Fannie and Freddie will successfully force banks to eat losses on 40 percent, leading to total losses of 10 percent. Why 25 percent? Why 40 percent? The analysts don't say. JPMorgan expects private-sector investors to be able to saddle banks with just 5 percent of foreclosure losses, citing a host of technical legal hurdles that make it hard for investors to have their cases heard in court.
So JPMorgan's loss projections are nothing more than a guess—and a low-ball guess at that. JPMorgan is assuming that only five to 10 percent of looming foreclosure losses will actually hit big banks. Change that assumption—20 percent, 60 percent, 80 percent—and things get far worse for Wall Street than JPMorgan's "worst-case" scenario predicts.
Let's consider the exposures of a single bank to put things in context, and let's pick Bank of America, since analysts seem to agree that BofA has the most to worry about right now. They were a big issuer of mortgages themselves, but they also purchased the notoriously predatory Countrywide Financial and also picked up securitization behemoth Merrill Lynch in 2008, giving them far more problems (hilariously, BofA actually paid cash to acquire these balance-sheet-busters).
The most dire estimates for losses on Fannie and Freddie loans at BofA have come from Christopher Whalen at Institutional Risk Analytics and Branch Hill Capital. Whalen has estimated $50 billion in Fannie and Freddie losses for the megabank, while Branch Hill has estimated $70 billion.
The trick is, BofA has $2.1 trillion in total exposure to Fannie and Freddie, according to Whalen. That means even Branch Hill's massive loss projection only amounts to a loss rate of about 3.5 percent.
As of July 2010, Fannie Mae had a serious delinquency rate of 4.82 percent—these are loans where families have missed at least three payments, but haven't been evicted. For Freddie Mac, the number is 3.83 percent. Not all of those losses can be pushed back on the banks, but those numbers will go up as the unemployment rate stays high. Tip the scales just a few percentage points and it's easy to envision catastrophic losses for banks.
But there's reason to believe that Bank of America is in even worse shape with regard to Fannie and Freddie than any of its peers. Countrywide was the single largest provider of loans to Fannie Mae during the housing bubble. Literally 28 percent of the loans Fannie Mae bought up in 2007 came from Countrywide. Fannie even featured a full-page, smiling photograph of Countrywide CEO Angelo Mozilo in their 2003 Annual Report (.pdf, see page 16).
It's much easier for banks to lose money on bad loans they sold to the GSEs than it is for them to lose money on securities they sold to purely private-sector investors. The fact that Bank of America's most notorious wing was the top provider to Fannie Mae during the peak years of the housing bubble does not bode well for the bank's balance sheet.
But this is just exposure to Fannie and Freddie. The private sector is angry about all kinds of things—from wronged borrowers to deceived investors. Investors are already organizing against both mortgage servicers—for improperly handling troubled loans—and against investment banks—for selling them garbage. They aren't just angry about fraudulent foreclosures—evidence is mounting that mortgage servicers can't even handle the profits from mortgages correctly, and aren't sending investors reliable, verifiable payments.
Yesterday investors sent a letter pressuring Countrywide's servicing arm to push losses from bad mortgage bonds back on the bank that sold them. Legally, it's a complicated maneuver, since Countrywide itself issued those bonds—but that just shows the multiple levels at which megabanks like BofA are exposed to fraud losses. Their original sale of mortgages to borrowers, the packaging of those mortgages into securities, the handling of payments and foreclosures, and the accounting for all of these activities—all of this is about to be subjected to serious fraud examinations by people who are trying to make money.
Up until yesterday, big banks thought they had a get-out-of-jail free card on investor lawsuits. Investors have to bring together 25 percent of the buyers of any mortgage bond in order to sue the bank that issued it—even if the actual lawsuit is an open-and-shut fraud case. Investors had not been cooperating. But yesterday's letter to Countrywide is a big deal—even though it's not (yet) a lawsuit, some of the biggest names in finance were going after Countrywide's cash: BlackRock, PIMCO and even the New York Federal Reserve.
Bill Frey, who runs the hedge fund Greenwich Capital, has organized a massive clearinghouse of mortgage investors for the express purpose of bringing lawsuits against big banks that issued bogus mortgage-backed securities. He told me this afternoon that he's about to move: In the next couple of weeks Greenwich and other investors will bring big lawsuits against major banks.
Will these combined troubles be enough to sink any big banks? If investors can win a couple of lawsuits, easily.
eric seiger
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger eric seiger
eric seiger
eric seiger
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
big seminar 14
In June, 2008 I wrote and published the following article: HUD'S 9 Step Program to Home Buying. At that time I had no clue what the rest of the year would bring. Like so many people, I didn't expect the stock market crash of 2008. The news media was publishing a lot about people encountering home loan problems and I was simply attempting to write an article which might help some people on the pathway to successful home buying.
The bad news is since that article was published the foreclosure market has taken real estate center stage due to the economic crisis of 2008-09. The good news is many of HUD's programs are redesigned to address the foreclosure issue and there are a lot of programs to help home owners faced with the possibility of going into foreclosure. Plus, the present economic condition has brought on a buyer's market making some truly outstanding properties affordable to people who might be interested in selling their home to purchase their ultimate dream home.
Ignore The Naysayers - BOSTON.com vs MSNBC.com
On November 20, 2009, the Boston real estate projections report foreclosures may climb to eleven percent or higher before it all settles out. The reason being, according to boston.com real estate news, is the "rising jobless rate." Msnbc.com's report headlined a foreclosure decline for the past 3 months and credit government foreclosure prevention programs for the decline.
The reports may seem to contradict one another leaving readers to wonder which one is reporting the facts? Really, both are reporting the same facts only each news source puts the emphasis on different aspects of the issue. The unemployed statistics do indicate climbing foreclosures. In response there have been effective government programs developed to meet the need of rising foreclosures. With better information more people will be able to access needed help to prevent foreclosure. And, come on. Regardless of your political persuasion - forget politics for a change! People need help avoiding foreclosure until the market stablizes sometime next year.
On Tuesday, December 8, more money was released into job programs through President Obama's newest economic initiative. David Dayen reported President Obama's speech on job creation today (December 8, 2009) will define three key areas where the Administration wants to indirectly devote part or all of the $200 billion dollars in unexpected TARP savings - small business job creation, infrastructure investment, and "cash for caulkers" clean energy programs.
Recognize Banks and Mortgage Companies Don't Want Foreclosed Property
Foreclosure is a necessary financial process to resolve default mortgages. However -banks, mortgages, and the federal government do not want a glut of foreclosed property. Hoping to prevent the present foreclosure crisis President George Bush in 2007 initiated a plan to help struggling homeowners remain in their homes. One part of his plan was a 5 year freeze in the interest rate for those with adjustable interest rate mortgages rate (ARM).
President Obama has initiated government assistance to home owners and home buyers through many new programs such as The Make Home Affordable Program. The HUD site front page is specifically designed to assist people avoid foreclosure and help people buy a home. And, HUD has added a whole section dedicated only to the issues regarding home ownership including an option to speak with a trained housing counselor. HUD housing counselors offer advise free of charge. The information is basic, factual, and step-by-step help for home those who find themselves faced with a possible foreclosure and for home buyers.
In addition to HUD help there are many options available for home owners other than going into foreclosure. Some of those are: refinancing, restructuring other obligations, taking out an equity loan, and possibly taking in a border.
GET PROACTIVE
The first recommendation from every source is to be aware of the possibility and be informed on how to take action if and when needed. Don't ignore the warnings! You might fall into foreclosure just by ignoring the warnings. If you have to be late or even miss a house payment, go immediately and talk to your lender.
FORECLOSURE IS PERSONAL BUT FOLLOW GOOD BUSINESS PRACTICES ANYWAY
1. Get informed about the available options.
2. Make a plan to go where you want to go.
3. Make personal contact with mortgage representatives as well as phone contact and keep paper record including who you contacted and the date of the contact.
This article presents excellent links to expert advise and information! If you find more please leave a comment for others to follow.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
Why MSNBC Isn't The Liberal Fox <b>News</b> - TV Guidance - Macleans.ca
The network just gave an “indefinite” suspension to its star pundit, Keith Olbermann, for giving money to three Democratic candidates. The president of MSNBC, Phil ...
The Morning Line: There's <b>News</b> Beyond Zenyatta - NYTimes.com
Friday's horse racing roundup, including a look at the day's Breeders' Cup races.
Great, great <b>news</b>: Pelosi might stay on as House minority leader <b>...</b>
Great, great news: Pelosi might stay on as House minority leader.
eric seiger
