Underwriting the SubPrime Crisis

Foreclosures continue to tick higher, reaching all sorts of nasty levels in Q3, climbing to 20 year highs:

"The rate of homeowners going into foreclosure hit a record high in
the third quarter, while those late with their payments rose to the
highest level since 1986, according to mortgage lenders’ trade group,
which forecast that the meltdown in the mortgage and real estate
markets shaking the U.S. economy will continue to worsen over the next

The Mortgage Bankers Association reported that 0.78 percent
of mortgages entered the foreclosure process in the three months ended
Sept. 30. That figure is up from 0.65 percent in the second quarter –
the previous record high – and more than double the 0.32 percent rate a
year earlier. The homeowners entering foreclosure brought the
total percentage of loans in the foreclosure process to a record high
as well of 1.69 percent, or 768,000 homes.

The report also showed
that 5.59 percent of borrowers are now at least 30 days late making
their mortgage payments, which is just below the record high of 5.68
percent set in 1986. And 1.26 percent of the borrowers were 90-plus
days late, putting them at significant risk of going into foreclosure."

Hey, that’s good stuff. How did the simple process of securitization go so far awry? I’m not sure how, but at least we know who to thank for the too clever by half excesses of the past cycle, thanks to this nice table from this morning’s NYT on who was underwriting all of the sub-prime securitized products:




"The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives.

In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks.

Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly."

Nevertheless, the loans that many banks packaged are proving to be increasingly toxic. Almost a quarter of the subprime loans that were transformed into securities by Deutsche Bank, Barclays and Morgan Stanley last year are already in default, according to Bloomberg. About a fifth of the loans backing securities underwritten by Merrill Lynch are in trouble.



Foreclosures reach record high
Chris Isidore
CNNMoney.com, December 6 2007: 12:34 PM

Wary of Risk, Bankers Sold Shaky Mortgage Debt
NYT, December 6, 2007

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What's been said:

Discussions found on the web:
  1. michael schumacher commented on Dec 6

    The CEO of “douche” bank reportedly turns down the top job at C.

    Seems to me he could have lessened the blow to himself had he just changed addresses, at least with respect to what C has in default over douchebank.

    perception seems to be ALL that matters at this point.


  2. Fiuman commented on Dec 6

    it is not what DBank has in default, it is what it has originated and what part of taht is in default. Having underwritten the note doesnt mean they are the holders! as a matter of fact, i believe DBank is net short the Sub-prime CDOs. It is possible that it managed to sell to UBS, Citi or other suckers all of its CDOs. We simply dont know, which is why the situation is so bad – no one is telling, but someone HAS to have the bad stuff…

  3. lewis commented on Dec 6

    So today we get a flood of Foreclosure news, just prior the to 1:45 announcement of the great subprime bailout plan. And the funniest detail released so far, it is just for mortgages resetting starting 01/08 (that were obtained from 01/05 to 07/05), so they are picking a small portion of the mess, then trying to suppress the deliquency numbers just enough to look good through the election.

    Yes, a lot of this is about perception. This plan reeks to high heaven, I think it is just putting lipstick on a pig. But like I said, anything to make things look good for the election, and this is just one of many they are up to.


  4. peter from oz commented on Dec 6

    NYTs got it wrong again
    don’t they understand it’s all hedged with counterparties
    and the first rule of hedging is KNOW YOUR COUNTERPARTY
    anyhow everything is fixed this afternoon
    what a relief!!
    rgds pcm

  5. michael schumacher commented on Dec 6

    look at the table…….the relative position of the two in originations and default.

    It’s not my chart so I can’t speak to what you’re interpretation of it is.

    And yes I am well aware that they may or may not own them… The banks have spent untold millions to make sure we understand that they don’t know either….


  6. michael schumacher commented on Dec 6

    Someone answer this:

    Freezing returns on MBS paper (the “bad loans”) has the effect of the gov’t capping return on the back side of the original loan.

    If you are a holder of MBS paper and are being told to kiss off any accelerated returns for a five year period (that was just about to start paying off large) what would you do with them..???

    leave it to the Bush administration to come up with a plan that induces panic selling in a market that has no buyers.

    This has litigation written all over it…nevermind that you are now in the process of undoing over 200 years of contract law by simply appearing to help a situation that cannot, on a large scale, be helped at all. Free markets would take care of this problem but it would hurt and the GOP can’t have any “hurt” for the next several months.

    How about making homes affordable again by removing the excess from the system??..nope can’t do that.


  7. Dave commented on Dec 6

    1/ There’s no election for another year
    2/ All that is happening is that a lot of people who used to rent got a chance to pay for a mortgage for a while and are now back to renting.
    3/ No major financial institution, not even Countrywide or Northern Rock has gone bankrupt anywhere.

  8. Mike M commented on Dec 6

    I just read on minyanville.com that 16% of all home equity loans are delinquent 60+ days. 16%! My bet is that almost all those subprime borrowers have seconds. The bailout is simply a way to give the banks more time before they implode.

  9. peter from oz commented on Dec 6

    you underestimate the generosity of the US taxpayer
    remember the s&l crisis he paid for it
    remember the texas bank crises he paid for it
    now do something constructive and ring an experienced rescuer and direct them to the tax losses available while the government guarantees the debt (nice little IRS loophole not completely closed yet)
    rgds pcm

  10. Ross commented on Dec 6

    Of course I’ll still love you in the morning

    The check is in the mail

    I’m from the government. I’m here to help

    I am not a crook

    Subprime is contained

    This is not a bailout

    Rank them as you will. Feel free to add your favoretts. Gotta go move the beef critters onto the winter wheat.

  11. michael schumacher commented on Dec 6

    The securities market got fat on this market and now does’nt want to do “price discovery”-
    which has replaced the word loss along with volatility.

    Hope Now is DOA


  12. Groty commented on Dec 6

    Paulson says the plan he’s promoting will “fast track” 1.2 million borrowers. Those are borrowers who can afford the teaser interest rate but not the rate that resets higher.

    It’s amazing that he can suddenly see how 1.2 million borrowers won’t be able to handle a higher interest rate. But when he headed Goldman, who collected hundreds of millions of dollars in fees by underwriting this garbage, he and his bankers didn’t see it. What’s changed?

    Does eyesight of the former head of Goldman, and that of the bankers under him who underwrote this crap, improve to 20/20 after their multi-million dollar bonus checks clear the bank?

  13. Hal commented on Dec 6

    what is absolutely amazing is how this has become a political football in that the spin is how great are we for helping the public(out of a problem we helped create)


  14. Don commented on Dec 6

    “I’ll love you ’til the end of time…and now I’m waiting on the end of time so I can end my time w/ you…”

    …Meatloaf for the beef critters.

    My very first contract case in law school (yeah, ugh, I’m one of those) involved a woman who had borrowed money at an exorbitant rate in order to buy bread for her family during the Nazi occupation of Greece in WWII. People were starving everywhere. She borrowed the money at about 50% interest per month. The question was whether the contract was enforceable. Of course my law school classmates, all w/ very tender young hearts, wanted to void the contract. I, being a bit older than most of my mates, had already developed a healthy cynicism about government intervention in private affairs and said the opposite, pointing out that if this contract isn’t enforced, what will happen to the next woman whose family is starving and needs to borrow money at usurious rates to keep her family alive? It turned out I was right. The judges (all Greek) saw the danger in willy-nilly avoidance of contracts, and forced her to pay.

    It appears, however, that our government has decided to ensure that there will be no further lending to the starving amongst us.

  15. Winston Munn commented on Dec 6

    Don (or another attorney),

    Answer a question if you will. It is my understanding that the only mortgages that can be affected are those still held by institutions, as that is the only time both parties to the contract have ownership of the contract.

    The Mortgage Backed Securities have been packaged and sold, sliced and diced, repackaged and then resold – how do you get the owners of these contracts – which may be hundreds of investors – together at the same time to even consider accepting an altered contract?

    And how would you compensate the holders of bond insurance for the change in terms?
    Surely the change would qualify as a default and force a payment by the insurers?


  16. wunsacon commented on Dec 6

    And, Groty, I read somewhere that a perk for citizens leaving the private sector for public “service” is a “tax holiday” to sell all their stock within a certain period without paying taxes on the gains.

  17. randy commented on Dec 7

    Tell me again why these institutions are afraid of companies like Wal-Mart getting into banking?

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