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Friday, May 02, 2008

Some Mortgage News To Ponder

Action on the FHA plan to expand it into refinancing of troubled mortgages has hit a snag in the Senate. It's not clear why, but any pause for reflection would be good.

Prime defaults are rising rapidly, Alt-A are through the roof, and the ratings on prime jumbo MBS are beginning to be cut.

The word "subprime" has been used to obfuscate the true nature of the problem, which is speculative mortgages granted without verification of ability to repay and without observing the old shared risk principles. Mix that with an environment in which home values are dropping rapidly, and you have a maelstrom of mortgage misery developing.

One thing that just has not been discussed in the press is that subprime MBS are going bad, but subprime investment-grade tranches have far more protection from pool losses than Alt-A or prime MBS investment tranches do.

Some Alt-A deals have 8% below the investment grade tranches, whereas many subprime had 20%. So when you start to see delinquency rates of over 30% in some of these Alt-A pools, the investment grade tranches may take a worse hit than the investment grade tranches in the better subprime pools.

Also, non-mortgage types just don't realize the truth about prime mortgages. Prime borrowers get into trouble just like non-prime borrowers. However prime borrowers have traditionally started out with enough equity in the home so you can do a workout for less severe problems or the borrower can sell the home and clear the debt for more serious problems. There's only a really low foreclosure rate on prime loans because of that cushion. Bad things happen to people with 720 FICOs just like they do to people with 600 FICOs.

As soon as a prime borrower loses enough equity in the home, the mortgage is now an Alt-A ex post facto. And as for the Alt-A borrowers, in this environment they end up being more like subprime than prime, because they have nothing to defend and no cushion even if they want to work the loan out.

One of the problem with prime jumbos is that when interest rates change, your better borrowers refi quickly and degrade the quality of the pool very quickly. Another problem with recent jumbo vintages is that they are concentrated in bubbly areas and are losing collateralization much more quickly than the prime conventional, which are far more evenly distributed.

People just don't realize what is going to happen down the road. The reason the banks aren't lending to each other at low rates is because the banks are now mostly non-prime borrowers.

Read what Countrywide is experiencing::
                                                90+ Day Delinquencies
Banking Operations Loans Held for Investment
March 31, December 31, March 31,
2008 2007 2007
Pay-Option 9.4% 5.7% 1.0%
Other First Lien 3.3% 2.1% 0.9%
Prime Home Equity 2.3% 1.6% 0.9%
Subprime 11.6% 0.0% 0.0%
Total 4.6% 3.0% 1.0%
Banking Operations Loans Held for Investment
March 31, December 31, March 31,
(amounts in thousands) 2008 2007 2007
Pay-Option $125,298 $35,449 $5,059
Other First Lien 40,592 14,753 3,334
Prime Home Equity 318,853 141,616 24,664
Subprime 363 - -
Total $485,106 $191,818 $33,057

Servicing Portfolio
Delinquencies (1) Quarters Ended

March 31, 2008 December 31, 2007 March 31, 2007
Total 90+ day Total 90+ day Total 90+ day

Conventional 1st liens 6.48% 3.19% 5.76% 2.28% 2.85% 0.82%
Government 1st liens 12.29% 5.00% 14.38% 5.27% 11.32% 4.41%
Prime home equity loans
(including FRS) 8.29% 4.58% 7.32% 3.61% 3.77% 1.75%
Subprime loans 35.88% 21.04% 33.64% 17.25% 19.62% 7.82%
Total servicing
portfolio 9.27% 4.81% 8.64% 3.78% 4.90% 1.70%

Countrywide is one of the largest servicers in the country. Look at what's happened in a year.

Bulb lights up above head of "non-mortgage" type.

The numbers are daunting to say the least; then you add in the oversupply of homes in many areas, and you feel the world shake beneath your mortgage portfolio.
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