Conversation with another friend in the “innards” of the mortgage industry

[davelj]

Earlier today I spoke to another friend of mine who is planted firmly in the innards of the whole mortgage mess. He’s a senior exec with a company that provides consulting and mortgage analytics to banks, thrifts, investment banks, securitizers, etc. It’s a big company with over $250 million in revenue last year, so they have a lot of reach. He had the following to say:

“The industry is in total meltdown. We expect IndyMac to go to zero, and WaMu to possibly survive, although that’s a coin flip. At best the company survives and its stock is in the teens. We expect to see some other companies taken out on a stretcher too – possibly Downey – but it’s hard to say exactly which ones because they each have their own peculiar balance sheet quirks. As a group, these guys have a lot of paper on their balance sheets that they can’t sell (to securitizers) and that they never planned on holding onto. As a group, these loans are toxic. Then they’ve got a bunch of other loans that they simply mispriced a few years back, held them on balance sheet and now they’re toxic too. I’ve been in this business for 15 years and this is as close to armageddon as it gets. The speed of the deterioration in these loan pools is unprecedented. And the Fed really can’t do anything to help – the problems lie beyond rate assistance. Blah blah blah. ”

You get the picture. And it ain’t a pretty one.

[lindismith]

keep it coming, Dave. It’s much appreciated.

[lindismith]

keep it coming, Dave. It’s much appreciated.

[lindismith]

keep it coming, Dave. It’s much appreciated.

[JWM in SD]

Dave,

did he have anything to say about Country Fried Financial and CEO Godzilla? My Jan 08 puts and I thank you in advance 😉

[JWM in SD]

Dave,

did he have anything to say about Country Fried Financial and CEO Godzilla? My Jan 08 puts and I thank you in advance 😉

[JWM in SD]

Dave,

did he have anything to say about Country Fried Financial and CEO Godzilla? My Jan 08 puts and I thank you in advance 😉

[HereWeGo]

This all comes down to people defaulting on their debt obligations. If the Fed lowers rates enough, and people can refi at a lower rate (where they can meet the debt service), then most of these problems simply disappear.

[HereWeGo]

This all comes down to people defaulting on their debt obligations. If the Fed lowers rates enough, and people can refi at a lower rate (where they can meet the debt service), then most of these problems simply disappear.

[HereWeGo]

This all comes down to people defaulting on their debt obligations. If the Fed lowers rates enough, and people can refi at a lower rate (where they can meet the debt service), then most of these problems simply disappear.

[bsrsharma]

What are his assessments on Countrywide, Bear Stearns and Wells Fargo? Survivable? Come out healthy?

[bsrsharma]

What are his assessments on Countrywide, Bear Stearns and Wells Fargo? Survivable? Come out healthy?

[bsrsharma]

What are his assessments on Countrywide, Bear Stearns and Wells Fargo? Survivable? Come out healthy?

[davelj]

He didn’t mention Countrywide, Bear Stearns or Wells Fargo specifically, but they’re all obviously in varying degrees of trouble. I’d say Countrywide has the most risk of the three, followed by Bear Stearns and Wells Fargo, respectively. Wells’ exposure to the mortgage business, while large in an absolute sense, is probably the smallest of the three relative to their total business and balance sheet. But I don’t know what volume of LBO pier exposure Wells has, while we know that Bear Stearns has some and Countrywide practically none. That’s probably not very helpful, but that’s all I know.

HereWeGo, you’re mistaken if you believe this is simply a short-term interest rate issue. It is not. It’s a “risk premium” issue. Here’s the problem: even if the Fed lowers rates to 2% tomorrow, the institutions that made the ridiculous 2/28 and 3/27 subprime loans won’t be loaning out at the 2004-2006 teaser rates (2%-4%). The market won’t take the paper. Those days are over for the foreseeable future. The problem is the risk premium that gets attached to whatever “base” teaser rate the lenders need to charge (to sell the paper) is now considerably higher and will remain so for quite some time. This increased risk premium will offset any decline in funding costs. In other words, short-term rates could plummet but mortgage rates for subprime/non-conforming paper probably won’t budge (that is, unless they go higher). The market has a newfound respect for risk premia and that won’t change anytime soon. Believe me, most of these problems will not “simply disappear.” I think you have a misunderstanding of the problem.

[davelj]

He didn’t mention Countrywide, Bear Stearns or Wells Fargo specifically, but they’re all obviously in varying degrees of trouble. I’d say Countrywide has the most risk of the three, followed by Bear Stearns and Wells Fargo, respectively. Wells’ exposure to the mortgage business, while large in an absolute sense, is probably the smallest of the three relative to their total business and balance sheet. But I don’t know what volume of LBO pier exposure Wells has, while we know that Bear Stearns has some and Countrywide practically none. That’s probably not very helpful, but that’s all I know.

HereWeGo, you’re mistaken if you believe this is simply a short-term interest rate issue. It is not. It’s a “risk premium” issue. Here’s the problem: even if the Fed lowers rates to 2% tomorrow, the institutions that made the ridiculous 2/28 and 3/27 subprime loans won’t be loaning out at the 2004-2006 teaser rates (2%-4%). The market won’t take the paper. Those days are over for the foreseeable future. The problem is the risk premium that gets attached to whatever “base” teaser rate the lenders need to charge (to sell the paper) is now considerably higher and will remain so for quite some time. This increased risk premium will offset any decline in funding costs. In other words, short-term rates could plummet but mortgage rates for subprime/non-conforming paper probably won’t budge (that is, unless they go higher). The market has a newfound respect for risk premia and that won’t change anytime soon. Believe me, most of these problems will not “simply disappear.” I think you have a misunderstanding of the problem.

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