THE NUMBERS DON'T ADD UP. Total Subprime & Alt-A Foreclosures = $92.8 Billion

[Junkdrawer]

Here, you look for yourself:

Subprime: http://www.newyorkfed.org/regional/States_ABS_2008_08.xls

Alt-A: http://www.newyorkfed.org/regional/States_AltA_2008_08.xls

The total Subprime universe is $536 Billion. 10.7% are in Foreclosure. = $52.1 Billion
The total Alt-A universe is $727 Billion. 4% are in Foreclosure. = $40.7 Billion

What are they saying? Do they see foreclosures IN BOTH CATEGORIES hitting 60% ???

And what about the $250 they've already given FannyMae, FreddyMac & Bear Sterns?

[dkf]

1. Why no info on prime mortgages in default?

[TwilightZone]

2. The $700B figure must include non-sub-prime and non-Alt-A paper.

We have to bail out Ed McMahon, right?

[radfringe]

32. and includes the golden parachutes,

the bush-buddy No-bid privatization contracts to manage the bailout, assistance money to the poor billionairs so they don't have to cut back on 'staff' (that would mean job cuts).

the way it's going to work - we are going to pour more money into the top to help them out, in return we will be tinkled on.

[specialed]

3. That doesn't include...

The current filings which are @ 9500 per month + the fact that since the economy is going south x% of good mortgages will go bad too.

[lonestarnot]

4. And those good mortgages will fail do to job losses or will bushitler just unitary executive them as

bad?

[galileoreloaded]

5. Prime default is spiraling up.

do a search on Bloomberg regarding the speech Jamie Dimon from JPMorgan gave regarding prime. I think he said "prime looks terrible"

[Vincardog]

6. The central banks have been trading about 12 TRILLION $ worth of DERIVATIVES based on these mortgage

They have been running a ponzi scheme and it is falling apart.Right now they are pumping billions into the stock market in an effort to trick you into putting your money in while they sneak their money out the back door.

[endthewar]

19. Couldn't have said it better!

:hi:

[Warpy]

7. The problem is that nobody knew what the exotic securities

that have been traded around for 20 years actually were. Their prices got pumped beyond all reason and now infect the balance sheets of every major institution.

It was a year ago last month that the awful truth began to dawn on the whiz kids. Those high yield sure things were just bits and pieces of mortgages and depended entirely on the ability of people to pay them down to have any value at all. They certainly weren't worth the purchase price.

Yes, prime mortgages are now failing in areas that saw hyperinflation. However, that's only a small part of the puzzle, too. What is really causing all the commotion is the fact that banks, brokerages and insurance companies with a large number of structured investment vehicles on the balance sheet are actually insolvent.

The magnitude of the swindle that's gone on ever since Ronnie started the deregulation ball rolling is difficult to comprehend. We're just starting to get a glimmer of an idea just how bad things really are.

[HamdenRice]

8. Very good question, but there is a simple answer

You have asked a very good question and I hope lots of DUers pay attention to the answer, because it is key to understanding the crisis.

Ironically, as you point out, not that many homeowners are actually in default. So the question is: why are a relatively few defaults causing such massive collapse of the mortgage backed security (mbs) market?

The short answer: just a few bad mortgages can destroy an entire pool of mbs. That's why so many people are blaming securitization: it multiplied the problem many fold.

It's because the good has been packaged with the bad. Let's use a simple model and say a particular mbs is backed by 100 mortgages -- each is for $100,000, and each one is paying 5% interest ($5,000 each). That "series" of mbs would have a face value of $10,000,000 and pay $500,000 per year.

The contractual requirements are very severe and say that the mbs is only performing if exactly $500,000 is paid out annually.

Now let's say that 5 out of 100 homeowners go into foreclosure. The mbs now collects $25,000 less. The total interest it can distribute to the holders is now $475,000.

In the debt world, that means the bond is in default. As debt it is worthless. It would be different in the stock world, where investment income (dividends) are expected to vary. In the debt/bond/mbs world, if the security doesn't pay exactly what it's supposed to it can't be valued, and no other bank or investor will buy it.

This is why it's so frustrating to hear DUers screaming that mbs are worthless, junk, toilet paper, etc.

They don't realize that this stuff still has value and that the bailout is about separating the good from the bad so it can be valued and sold again.

There is a difference between something that can't be valued and something that has no value.

[Junkdrawer]

9. Why do they need $950 Billion (700 new + 250 to date) if only $92 Billion is bad?

I think I'm reading that you agree that a cool, logical, careful bailout will be FAR less expensive than the panic Bush & Co. is selling.

[HamdenRice]

11. Those are up front costs; they are already saying they may make money on it long term

In my model, $500,000 worth of foreclosures made $10,000,000 worth of mbs worthless.

But if the feds want to undo the mbs and separate the good from the bad, they still have to buy the entire mbs series. In my model, your upfront cost would be $10,000,000 - $500,000 = $9,500,000 .

So $500,000 worth of foreclosures requires the govt to spend $9,500,000 up front. If they bargain the holders down to, say $8,000,000 then their upfront costs are only $8 million. According to news sources, they plan to drive very hard bargains with the financial institutions which are desperate to sell. That's why they say they will buy at a "steep discount."

Now, if they get rid of the $500,000 foreclosures from the series, they can turn around and sell the new series of mbs for $9,500,000. This will be with a fed seal of approval.

The feds make $1,500,000 on the deal.

That's what they are planning to do. Remember the huge cost is the "upfront cost" not the eventual total cost.

[Junkdrawer]

14. Why can't large banks do this for themselves?

:shrug:

[alcibiades_mystery]

16. They don't have enough time

The various default conditions (including ratings downgrades) trigger immediate action on the part of the banks. Moreover, their other transactions require additional lending (even for daily operations) which is hooked into capital requirements, etc, so there is a cascading effect as they try to gather their "up-front costs." They don't have enough ready money or time to do it themselves.

[HamdenRice]

18. That too -- time is of the essence

Just the feds saying they are going to do this has helped calm the markets.

[HamdenRice]

17. Because of the liquidity crisis

Funny thing, I was going to write something last year when the sub prime crisis hit -- a kind of jokey post that a small army of lawyers and accountants hired by a consortium of banks could solve the problem. The banks almost did something like this last summer.

The problem is the crisis festered, and now the banks don't have the liquidity (spare cash) to do this. Moreover, the markets are so spooked, they wouldn't be able to sell the resulting mbs. No one would buy.

Even the govt isn't talking about when they would repackage and unload this stuff, but clearly that's what they're going to do. There is a little more discussion about how they will find the info to unravel this stuff here -- it explains the feds already have the prospectuses and registration statements that can help unwind these mbs:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x43574

[Junkdrawer]

20. I'd feel more comfortable if I could trust the bailers....

The media is selling this as $700 Billion of lost money. And if that's the expectation, somehow I fear that will be the result.

[alcibiades_mystery]

22. That would assume 100% loss on the bonds

It's essentially impossible.

[HamdenRice]

23. True and that's what happened with the S&L crisis

complete boondogle with the feds selling off property for a song. Hopefully the bulk of this process will take place under an Obama administration.

But McCain is already talking about a quick privatization of Fannie and Freddie after the takeover. Wonder how that would turn out!?!@#$%

[alcibiades_mystery]

21. As somebody who has produced S-1's for asset and mortgage backed securities

I find that incredible!

:wow:

[HamdenRice]

24. I used to draft them also

I barely understood what I was writing sometimes. OK most of the time.

A big problem at that time was that everyone in the industry shamelessly copied each other. If your assignment was to create some new security, you went to the SEC website, downloaded some other firm's prospectus and registration statement, tried to understand it, and then redrafted it for our own clients.

As the "forms" were passed around the industry they became more and more complicated. Moreover, there were so many different cooks in the kitchen, and rarely did we understand each other's work. The lawyers understood the trusts and other agreements; the accountants understood some of the numbers; the bankers understood the economic modelling.

I always assumed my higher ups had everything under control, but from what I'm reading now it seems my intuition, that no one had the capacity to understand the whole thing, was correct.

But if the feds are going to unravel this stuff, the prospectus, registration statement and spreadsheets are where they start.

[HamdenRice]

34. I forgot -- one more reason the private sector can't do this unbundling/rebundling thing

Each tranche or series of mbs is sold to the "public" although financial institutions are the biggest buyers. So if an mbs series is, say $100 million, it is not just one investor that buys all $100 million. Let's say 20 different institutional investors each buy $5 million.

Now if we want to unbundle the underlying assets and rebundle and sell them, we have to collect all $100 million of that series in one place. That because the entire series represents a pool; individual securities don't represent particular mortgages.

Moreover, as a_mystery pointed out, there are different tranches with different characteristics. One tranche might be interest only; another might be principal only; and so on. So not only would you have to get every security from a series or tranche; but you might have to get dozens of tranches and series in order to get the entire thing in one place.

The banks simply can't do that -- they don't have the liquidity.

I suspect that the Treasury will use targetted buying to go after particular vehicles or trusts to unbundle.

[alcibiades_mystery]

12. Say $2 billion of bad is packaged with $18 billion good, in one (huge) mortgage-backed security

The Bond Agreement hooks these up such that problems with the bad tranche (the $2 billion) triggers various actions on the total bond (the $20 billion). You can't address the $2 billion in isolation for this reason.

[alcibiades_mystery]

10. That's exactly correct

The agreements are drawn up such that the first tranche is dependent on the the third, fourth, or fifth. It was a fake hedge all along.

[nashville_brook]

13. this is the most cogent explanation i've read on the crisis so far -- should be its own thread!

i'm so glad we have you around, HR!

[HamdenRice]

15. Thanks I want to write a general post about this

but things seem to be moving too fast to keep up!

[Waiting For Everyman]

25. If they're re-sliced again they'll be junk again, the whole concept is stupid.

Life isn't perfect. If bonds have to be perfect or they're worthless, then ever tying any of them together is preposterous. It's absurd to "package" them this way, it should be done as it used to be - whole. Nothing else is practical.

Life happens. Something bad is going to happen sometime, to each and every mortgagee. We should roll it back to how it used to be done... when it worked! Loans used to be made without credit scores, without computers, and without widespread foreclosures.

All of this quantifying doesn't fit RE. It needs people making decisions, not machines running risk assessments.

[rucky]

27. And isn't that what mortgage insurance is for?

Covers the first 20% of the loan-to-value. Housing hasn't gone down over 20%, has it? I know there's other costs involved with REO, but even in a total default, the lender is mostly covered.

[HamdenRice]

28. My example was just a model. In real life the mbs are more complex

They are "overcollateralized." That means that in real life, if the face value of the mbs series is $10 million, then there actually would be something like $10.5 million in mortgages. The $500,000 extra mortgages would be based on statistical studies of what percentage of homeowners go into foreclosure -- so some foreclosures were anticipated and built into the mbs.

What happened was that no statistical study predicted the severity of the current real estate down turn.

But in general, yes bonds must pay perfectly or they are in default. That's what makes them bonds.

[rucky]

26. Why can't the bailout be a re-package & re-purchase?

Investors get a chance to purchase A paper, the junk bonds get reinsured by FHA & the coverage on those defaults is the bailout?

[HamdenRice]

30. That seems like what is going to happen

That's why in the long term, the Treasury may make money on the deal. They are purchasing mbs at discount, repackaging with better overcollateralization and selling at a profit -- hopefully.

[Junkdrawer]

31. Something like that. Submit your junk, the government gives guarantees on the defaults...

and returns it to you. Then the government works with the defaulters, buying and reselling the property as a last resort.

As there is only $90+ Billion in default, it's a whole lot cheaper than the $700 Billion requested.

Not to mention the $400+ Billion spent to date...

[sendero]

29. Yes...

... but they have been packaged and LEVERAGED 100:1. That is the entire problem, when you have that kind of leverage even a tiny decline wipes out all of your value.

[Junkdrawer]

33. There's not enough money in the world to make all leveraged investments whole....

Might as well return all the money ever lost in Vegas.