who takes the loss ?

[bob007]

I had a simple question. Who will take the financial hit when homeowners default on mortgages they cannot afford ?

[HLS]

The underlying investors. If could be hedge funds, private funds, banks, Wall Street firms, Insurnace Co, or Govt backed (FNMA, FHA,) etc.

The spill over affects lots of people and jobs.
What Bernanke said was contained to subprime a couple of months ago is now “deteriorated significantly”
They still aren’t telling the truth, IMO.

[HLS]

The underlying investors. If could be hedge funds, private funds, banks, Wall Street firms, Insurnace Co, or Govt backed (FNMA, FHA,) etc.

The spill over affects lots of people and jobs.
What Bernanke said was contained to subprime a couple of months ago is now “deteriorated significantly”
They still aren’t telling the truth, IMO.

[bob007]

That is a lot of money to lose. It was not like they were charging a high interest rate to begin with. Why are people taking that kind of risk for a puny return (< 7%)

[bob007]

That is a lot of money to lose. It was not like they were charging a high interest rate to begin with. Why are people taking that kind of risk for a puny return (< 7%)

[JWM in SD]

“That is a lot of money to lose. It was not like they were charging a high interest rate to begin with. Why are people taking that kind of risk for a puny return”

Uhhh, what the hell have the bears here and on other blogs been screaming about for the past 18 months bob???!!!

That’s the point man, it isn’t worth the return when you factor in the appropriate level of risk that actually present in the investment. That is true whether you are the ultimate bagholder of the RMBS or that SFR investment in San Marcos that doesn’t seem to be appreciating at 15% per year anymore.

The thing to really be concerned about is if they want you and I to pay for it through a bailout of either the homedebtors or the banking institutions.

[JWM in SD]

“That is a lot of money to lose. It was not like they were charging a high interest rate to begin with. Why are people taking that kind of risk for a puny return”

Uhhh, what the hell have the bears here and on other blogs been screaming about for the past 18 months bob???!!!

That’s the point man, it isn’t worth the return when you factor in the appropriate level of risk that actually present in the investment. That is true whether you are the ultimate bagholder of the RMBS or that SFR investment in San Marcos that doesn’t seem to be appreciating at 15% per year anymore.

The thing to really be concerned about is if they want you and I to pay for it through a bailout of either the homedebtors or the banking institutions.

[bsrsharma]

Because they were misled! The rating agencies (S&P, Moody, Fitch etc.) made money by knowingly overrating the underlying securities. This was all orchestrated to get good fees for large investment banks and brokerage houses while letting dumb and greedy investors (many pension funds, 401(k), individual investors) left to hold the bag. But in a stroke of bad luck, a lot of big and rich investors are also going to lose their shirts and that is going to be fun to watch. Watch out for a rise in suicides a la 1929!

[bsrsharma]

Because they were misled! The rating agencies (S&P, Moody, Fitch etc.) made money by knowingly overrating the underlying securities. This was all orchestrated to get good fees for large investment banks and brokerage houses while letting dumb and greedy investors (many pension funds, 401(k), individual investors) left to hold the bag. But in a stroke of bad luck, a lot of big and rich investors are also going to lose their shirts and that is going to be fun to watch. Watch out for a rise in suicides a la 1929!

[HLS]

It was huge returns in the eyes of the lenders.
They often leverage 10 to 1.
When 5% was a market rate, getting 7% was 40% more, that’s huge to them, however on risky 2nds, they were getting up to 12%..

Alot of the risk was laid off to average investors, without them understanding the risks. Say that a Wall Street fund manager was given $100 million by investors. With that he could leverage $1 billion in mortgage loans.
He might get paid 2% off the top, so $2 million to start in his pocket.

The returns were then based on $1 billion, until the subprime defaults started.

Subprime bonds were risky to begin with, but Wall Street got VERY creative and carved them into tranches. So there were A rated bonds that were the “best” of the worst.
The rating agencies rated these bonds incorrectly!

Several of these hedge funds were declared worthless a few weeks ago. (Bear Sterns I think) The investors in these funds will probably get zero.

There are individual funds, pension funds and city governments that will be taking losses that they are not aware of yet.
It happened with junk bonds in the 80’s. Funds lose everything because of the leverage.

In the quest for higher returns, risks are taken. The fallout won’t be known for awhile, as they will lag in reporting the bad news as long as possible, and hope to offset with other returns or sweep it under the rug.

They cannot hide the losses forever.

[HLS]

It was huge returns in the eyes of the lenders.
They often leverage 10 to 1.
When 5% was a market rate, getting 7% was 40% more, that’s huge to them, however on risky 2nds, they were getting up to 12%..

Alot of the risk was laid off to average investors, without them understanding the risks. Say that a Wall Street fund manager was given $100 million by investors. With that he could leverage $1 billion in mortgage loans.
He might get paid 2% off the top, so $2 million to start in his pocket.

The returns were then based on $1 billion, until the subprime defaults started.

Subprime bonds were risky to begin with, but Wall Street got VERY creative and carved them into tranches. So there were A rated bonds that were the “best” of the worst.
The rating agencies rated these bonds incorrectly!

Several of these hedge funds were declared worthless a few weeks ago. (Bear Sterns I think) The investors in these funds will probably get zero.

There are individual funds, pension funds and city governments that will be taking losses that they are not aware of yet.
It happened with junk bonds in the 80’s. Funds lose everything because of the leverage.

In the quest for higher returns, risks are taken. The fallout won’t be known for awhile, as they will lag in reporting the bad news as long as possible, and hope to offset with other returns or sweep it under the rug.

They cannot hide the losses forever.

[JWM in SD]

Good post HLS, it’s great to have an industry insider posting here. It’s obvious from a lot of recent posts that a lot of are only just now connecting the dots.

“Subprime bonds were risky to begin with, but Wall Street got VERY creative and carved them into tranches. So there were A rated bonds that were the “best” of the worst.
The rating agencies rated these bonds incorrectly!”

More specifically, WS used the ratings to describe how the cashflows were to be allocated to the different tranches in the event of defaults at various levels and not about the composition of the individual loans in the tranches.

I have said here before, but a lot of posters here need to start looking at the macro picture instead of focusing on what is happening in SD alone because that is not seeing the forest for the trees and will lead to individuals lacking conviction and becoming knifecatchers over the next couple of years.

recommended reading:
Tanta at Calculated Risk (HLS, if you are really in the biz and don’t know who she is…well…)

Mish Shedlock

People need to start opening their eyes. It’s the magnitude of the credit debacle that makes me insist that it doesnt make sense to buy a house right now regardless of what your financial circumstances are and especially not because of one’s emtional state over this issue.

I tolerate posts from the SD Realtors of this site, because that is their job to appear unbiased about the RE market here in SD. But I won’t hesitate to tell someone my real opinion.

[JWM in SD]

Good post HLS, it’s great to have an industry insider posting here. It’s obvious from a lot of recent posts that a lot of are only just now connecting the dots.

“Subprime bonds were risky to begin with, but Wall Street got VERY creative and carved them into tranches. So there were A rated bonds that were the “best” of the worst.
The rating agencies rated these bonds incorrectly!”

More specifically, WS used the ratings to describe how the cashflows were to be allocated to the different tranches in the event of defaults at various levels and not about the composition of the individual loans in the tranches.

I have said here before, but a lot of posters here need to start looking at the macro picture instead of focusing on what is happening in SD alone because that is not seeing the forest for the trees and will lead to individuals lacking conviction and becoming knifecatchers over the next couple of years.

recommended reading:
Tanta at Calculated Risk (HLS, if you are really in the biz and don’t know who she is…well…)

Mish Shedlock

People need to start opening their eyes. It’s the magnitude of the credit debacle that makes me insist that it doesnt make sense to buy a house right now regardless of what your financial circumstances are and especially not because of one’s emtional state over this issue.

I tolerate posts from the SD Realtors of this site, because that is their job to appear unbiased about the RE market here in SD. But I won’t hesitate to tell someone my real opinion.

[patientrenter]

HLS, I think bob007 was dead on when he said that home loans originated in the last few years generally offered very low extra returns to start with.

Sure, you could choose to lever up those returns – and the risk – by borrowing to buy more home loans or their derivative assets, but that’s possible with any asset. That doesn’t change the return or risk of the underlying asset. We don’t say that equities offer a 25% long-term rate of return just because buying them with lots of borrowed money would have gotten you that return over the last 50 years.

And although I think the rating agencies did a poor job of rating the securities backed by recently issued home loans, I would lay 90% of the responsibility for underestimating the risk, and driving the whole process in the direction it took, squarely on the investors. It was greedy investors looking for higher returns than offered by Treasurues that decided, of their own volition, to invest in bonds backed by home loans. They did this even though anybody, sophisticated or not, could see that the prices of the homes, and the generosity of the loans, were becoming ridiculous.

If you were selling something, and buyers made it clear they didn’t care about the quality of what you offered, wouldn’t you too eventually cur corners? It’s the buyers’ fault. They were a little dumb, but mostly greedy.

Patient renter in OC

[patientrenter]

HLS, I think bob007 was dead on when he said that home loans originated in the last few years generally offered very low extra returns to start with.

Sure, you could choose to lever up those returns – and the risk – by borrowing to buy more home loans or their derivative assets, but that’s possible with any asset. That doesn’t change the return or risk of the underlying asset. We don’t say that equities offer a 25% long-term rate of return just because buying them with lots of borrowed money would have gotten you that return over the last 50 years.

And although I think the rating agencies did a poor job of rating the securities backed by recently issued home loans, I would lay 90% of the responsibility for underestimating the risk, and driving the whole process in the direction it took, squarely on the investors. It was greedy investors looking for higher returns than offered by Treasurues that decided, of their own volition, to invest in bonds backed by home loans. They did this even though anybody, sophisticated or not, could see that the prices of the homes, and the generosity of the loans, were becoming ridiculous.

If you were selling something, and buyers made it clear they didn’t care about the quality of what you offered, wouldn’t you too eventually cur corners? It’s the buyers’ fault. They were a little dumb, but mostly greedy.

Patient renter in OC

[Author]

Posts