MaxedOutMama
Monday, March 12, 2007
Alt-A Busts
The significance of the New Century collapse, which was confirmed by New Century's 8K just filed, is that Alt-A risk-layered busted also.
The essence of New Century's filing is that its warehouse lenders yanked funding and demanded that New Century repurchase loans, eating up New Century's much touted capital reserves in the twinkling of an eye. Under ordinary circumstances the warehouse lenders would not have done this. By forcing New Century into bankruptcy, they lose recourse for those junk loans. So now they have to eat those losses. Clearly they had no confidence that New Century could succeed as an Alt-A lender.
Some significant parts of the filing:
Alt-A loans as written by many of these companies are not less risky than subprime. They probably will have fewer defaults overall, but overall their defaults will carry higher losses per default. If you don't verify a buyer's ability to make a loan payment, a FICO score means little. Aside from idiots who just don't bother to repay loans, risk in lending is related to whether a particular borrower has the ability to service loan payments. If that ability is not clear, then it's necessary to verify that the borrower has other assets it can liquidate to service loan payments. Whenever such verifications are not done, the lender is really relying on the ability to foreclose, which is equivalent to hard money lending. However, hard money lenders don't extend high Loan To Value ratio loans and they charge much higher interest and fees to cover the cost and expense of foreclosure and resale.
Alt-A and subprime lenders were really making hard money loans but not charging for them or restricting loan to value ratios to the point that principal could be recovered. As soon as housing stopped appreciating significantly, it was inevitable that those stuck with this paper would be taking heavy losses.
The underlying credit quality of the mortgage pools is worsening by the month. If foreclosures and defaults concentrate into an area, it is a well-known phenomenon of lending that those forced sales and foreclosures will drive the value of all housing in the area down. Once you reach the point at which one-fifth of the listings in a particular area and price bracket are forced sales or REO, the other would-be sellers are forced to compete with those houses on price, and the downward pricing spiral can't be broken. Given that most recent subprime and most risk-layered Alt-A loans were written with very high Loan To Value ratios (due to the dramatic housing appreciation) and on terms that virtually forced a refinance within a couple of years, the inevitable result of tightened lending standards is to prevent a number of refinances before foreclosure, creating more defaults and more foreclosures. At this point we can confidently expect the number of defaults to rise through 2009 at a minimum.
The monumental unaddressed financial scandal relates to the ratings companies. How and why did they put the stamp of approval on these loan pools? There will be lawsuits galore over this, and anyone who understands anything about the world of finance must be experiencing a complete loss of confidence in those ratings. There are unpleasant logical implications for the commercial credit market.
See OC Register blog post on subprime percentages (remember, this doesn't even include Alt-A), Calculated Risk for topical news and related commentary, and Housing Wire, who, like me, was stunned into silence this weekend.
The essence of New Century's filing is that its warehouse lenders yanked funding and demanded that New Century repurchase loans, eating up New Century's much touted capital reserves in the twinkling of an eye. Under ordinary circumstances the warehouse lenders would not have done this. By forcing New Century into bankruptcy, they lose recourse for those junk loans. So now they have to eat those losses. Clearly they had no confidence that New Century could succeed as an Alt-A lender.
Some significant parts of the filing:
As of March 9, 2007, all of the Company's lenders under its short-term repurchase agreements and aggregation credit facilities had discontinued their financing with the Company or had notified the Company of their intent to do so. Certain of these lenders had also purported to terminate the Company's servicing rights under the respective financing arrangement, as described in Item 2.04 of this Current Report.Other lenders are demanding repurchases also. The above are just examples. An entire industry segment just died, although some of the carcasses have not been buried yet.
...
The Company has received two letters from Bank of America, each dated March 8, 2007. The letters allege that certain subsidiaries of the Company failed to satisfy margin calls under that certain Third Amended and Restated Master Purchase Agreement ... as a result Events of Default (as defined in the respective Bank of America Agreements) have occurred. The letters also purport to accelerate the obligation of the Company's subsidiaries to repurchase all outstanding mortgage loans financed under the Bank of America Agreements.
...
The Company received a Notice of Termination of Servicing from Barclays, dated March 8, 2007, purporting to terminate the right of one of the Company's subsidiaries to service certain loans under that certain Master Repurchase Agreement, dated as of March 31, 2006, by and among the Company, certain of its subsidiaries, Barclays and Sheffield Receivables Corporation. In its notice, Barclays also requested that the Company and its subsidiaries take certain actions to facilitate the transfer of the servicing rights to a party appointed by Barclays.
Alt-A loans as written by many of these companies are not less risky than subprime. They probably will have fewer defaults overall, but overall their defaults will carry higher losses per default. If you don't verify a buyer's ability to make a loan payment, a FICO score means little. Aside from idiots who just don't bother to repay loans, risk in lending is related to whether a particular borrower has the ability to service loan payments. If that ability is not clear, then it's necessary to verify that the borrower has other assets it can liquidate to service loan payments. Whenever such verifications are not done, the lender is really relying on the ability to foreclose, which is equivalent to hard money lending. However, hard money lenders don't extend high Loan To Value ratio loans and they charge much higher interest and fees to cover the cost and expense of foreclosure and resale.
Alt-A and subprime lenders were really making hard money loans but not charging for them or restricting loan to value ratios to the point that principal could be recovered. As soon as housing stopped appreciating significantly, it was inevitable that those stuck with this paper would be taking heavy losses.
The underlying credit quality of the mortgage pools is worsening by the month. If foreclosures and defaults concentrate into an area, it is a well-known phenomenon of lending that those forced sales and foreclosures will drive the value of all housing in the area down. Once you reach the point at which one-fifth of the listings in a particular area and price bracket are forced sales or REO, the other would-be sellers are forced to compete with those houses on price, and the downward pricing spiral can't be broken. Given that most recent subprime and most risk-layered Alt-A loans were written with very high Loan To Value ratios (due to the dramatic housing appreciation) and on terms that virtually forced a refinance within a couple of years, the inevitable result of tightened lending standards is to prevent a number of refinances before foreclosure, creating more defaults and more foreclosures. At this point we can confidently expect the number of defaults to rise through 2009 at a minimum.
The monumental unaddressed financial scandal relates to the ratings companies. How and why did they put the stamp of approval on these loan pools? There will be lawsuits galore over this, and anyone who understands anything about the world of finance must be experiencing a complete loss of confidence in those ratings. There are unpleasant logical implications for the commercial credit market.
See OC Register blog post on subprime percentages (remember, this doesn't even include Alt-A), Calculated Risk for topical news and related commentary, and Housing Wire, who, like me, was stunned into silence this weekend.
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Now serving 'Blackened New Century'.
It's crispy, crunchy, and it's DONE!
ed in texas
It's crispy, crunchy, and it's DONE!
ed in texas
# posted by 
: 10:42 AM
: 10:42 AM
Done and Done IN.
From the sounds of it, Countrywide has massive layoffs underway. Once Alt-A and subprime are gone, what's left?
From the sounds of it, Countrywide has massive layoffs underway. Once Alt-A and subprime are gone, what's left?
Reading Tanta's excerpts of Ivy Zelman's report at CR, I'm basically reafirmed in my original position: the problem isn't actually sub-prime. The driver here is lax underwriting, and sub-prime is the marginal case that went off the cliff first. An AAA risk in a no-doc, option arm at 80% of net income is in pretty much the same boat, except for the ability to refinance a declining asset, and possibly other asset cushions. Then there's that whole negative savings rate...
ed in texas
ed in texas
# posted by : 4:31 AM
: 4:31 AM
Ed - very astute!!!
The worst losses are going to come in the higher FICO more loosely underwritten trash paper.
The worst losses are going to come in the higher FICO more loosely underwritten trash paper.
Unsecured loans are the loans where you are not required to pledge any collateral and collateral free loans are meant to be burden free loans.You can have the unsecured loans for debt consolidation, home improvement, to run smoothly your business, to buy a car of your choice or to go for an exotic holiday.There are unsecured loans for the bad credit holders too.With unsecured loans, there is no fear factor and there is the talk of benefits only.
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# posted by : 3:28 AM
: 3:28 AM << Home
