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DaCounselor
ParticipantMight be tough to get a short sale approved in this situation due to the fact that the guy has $90K of available funds that he could bring to the table. And I can’t see CW approving a short sale unless they are going to receive some payout. If CW is looking at a complete loss due to foreclosure of the 1st mtg., they may agree to a short sale for a token payout as something is better than nothing. I suppose a deal could be put together but based on the facts of this case there are alot of stumbling blocks.
This scenario illustrates how badly piggyback lenders/investors can get pounded by defaults. I am very interested to see how things develop over the next several years in this area. If values fall to the point that a piggyback lender will suffer a complete loss, what will they do if the borrower simply stops making payments on that loan (but keeps the 1st current)? Why spend money on the foreclosure process when you’re not going to see a red cent?
Piggyback lenders may be ripe for cents-on-the-dollar buyouts in these cases. Picture an 80/20 package – the borrower stays in the home by keeping the 1st current and wipes out the 2nd for pennies on the dollar. The borrower may have to play chicken and go into default on both mtgs to get to this result, then get back current on the 1st.
Anyway, just a thought.
ParticipantHis $90K is safe and he won’t get hit with a 1099. The fallout to him will be limited to a credit ding (more like dent).
As for what he should do – ethically – that’s another question. If you boil his deal with the lenders down to its essence, the agreement was that he will make certain payments over a certain period of time, and if he does not they can take the house. That’s the deal. And if anyone should know the ins and outs of these types of deals, it’s the lenders who do them everyday. Countrywide decided to go 95% LTV on this deal and now they are going to get pounded. Countrywide made a business decision and the deal is turning out bad. If this guy pledged his $90K, his 401K, his car, his baseball card collection, etc etc, as collateral for the deal, then those assets are in play. But that’s not the case here.
ParticipantHis $90K is safe and he won’t get hit with a 1099. The fallout to him will be limited to a credit ding (more like dent).
As for what he should do – ethically – that’s another question. If you boil his deal with the lenders down to its essence, the agreement was that he will make certain payments over a certain period of time, and if he does not they can take the house. That’s the deal. And if anyone should know the ins and outs of these types of deals, it’s the lenders who do them everyday. Countrywide decided to go 95% LTV on this deal and now they are going to get pounded. Countrywide made a business decision and the deal is turning out bad. If this guy pledged his $90K, his 401K, his car, his baseball card collection, etc etc, as collateral for the deal, then those assets are in play. But that’s not the case here.
July 11, 2007 at 11:44 AM in reply to: Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble, #65228ParticipantAgreed, Allan. The issue at hand for housing is the likely fallout from downgrades (aka credit contraction/removal of invstor demand). Certainly is likely to be an acceleration and expansion of fallout once the downgrades get underway.
At this time we’re still talking about a mere sliver of the market, as S&P apparently intends to analyze only $12 billion of the $565 billion subprime paper issued in ’05 and ’06. I believe they will be looking primarily at BBB rated paper (aka New Century, Fremont, etc paper) There’s alot of junk in there and I expect it to be rated as such shortly. The A paper appears high and dry, at least for now.
While I know of no one who knows for sure, the best guestimates that I am hearing suggest that foreign investors are holding the majority of equity and mezzanine tranches in harms way. We see evidence now of pension fund investment in some of this riskier paper, obviously bought to boost fund performance. They will get hurt on these deals but I would be surprised to see more than a few % of a fund’s assets placed in these risky investments, so they’re not going to get wiped out.
At the end of the day, this is not unexpected news, it was going to happen, lender/investors are going to lose lots of money (but how about those folks that are short equity and/or short mezzanine – looking pretty good right about now…) and there’s very likely going to be a decreasing appetite for funding/investing in subprime paper. This is another link in the chain reaction.
July 11, 2007 at 11:44 AM in reply to: Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble, #65290ParticipantAgreed, Allan. The issue at hand for housing is the likely fallout from downgrades (aka credit contraction/removal of invstor demand). Certainly is likely to be an acceleration and expansion of fallout once the downgrades get underway.
At this time we’re still talking about a mere sliver of the market, as S&P apparently intends to analyze only $12 billion of the $565 billion subprime paper issued in ’05 and ’06. I believe they will be looking primarily at BBB rated paper (aka New Century, Fremont, etc paper) There’s alot of junk in there and I expect it to be rated as such shortly. The A paper appears high and dry, at least for now.
While I know of no one who knows for sure, the best guestimates that I am hearing suggest that foreign investors are holding the majority of equity and mezzanine tranches in harms way. We see evidence now of pension fund investment in some of this riskier paper, obviously bought to boost fund performance. They will get hurt on these deals but I would be surprised to see more than a few % of a fund’s assets placed in these risky investments, so they’re not going to get wiped out.
At the end of the day, this is not unexpected news, it was going to happen, lender/investors are going to lose lots of money (but how about those folks that are short equity and/or short mezzanine – looking pretty good right about now…) and there’s very likely going to be a decreasing appetite for funding/investing in subprime paper. This is another link in the chain reaction.
Participant“I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.”
_______________________________This is a real possibility, PC. Especially the folks with non-recourse 100% loans that get way upside-down. And the bagholders will be the servicers/lenders/investors who signed-off on these very risky deals. The 2nds would really get murdered.
For the folks with recourse loans, we may see a trend develop in judicial foreclosures where lenders (particularly those battered HELOCs) go for the deficiency judgment instead of watching a couple hundred grand blow away.
A big red gash on the credit report is not ideal, but at some point I think some folks will just take the hit. They will do their own cost-benefit analysis. Every man has his price.
Participant“I think that homeowners will be walking in droves. Once people hear it’s OK to do so, they’ll be saying bye-bye to the lenders.”
_______________________________This is a real possibility, PC. Especially the folks with non-recourse 100% loans that get way upside-down. And the bagholders will be the servicers/lenders/investors who signed-off on these very risky deals. The 2nds would really get murdered.
For the folks with recourse loans, we may see a trend develop in judicial foreclosures where lenders (particularly those battered HELOCs) go for the deficiency judgment instead of watching a couple hundred grand blow away.
A big red gash on the credit report is not ideal, but at some point I think some folks will just take the hit. They will do their own cost-benefit analysis. Every man has his price.
Participant“At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.”
__________________________There is an awful lot of misinformation out there on this issue. For instance, with a non-recourse loan in CA, when the lender forecloses there is no debt cancellation income. Therefore there is no tax. And in some situations (like when a borrower files for bankruptcy or is defined as being insolvent) they may not be taxed for debt forgiveness on a recourse loan.
Anyone who is facing this type of situation needs to consult a knowledgeable tax attorney and accountant to get the straight story and prepare the most cost-effective strategy.
Participant“At some point, borrowers who are underwater are going to realize that forgiveness of indebtedness income is still income.”
__________________________There is an awful lot of misinformation out there on this issue. For instance, with a non-recourse loan in CA, when the lender forecloses there is no debt cancellation income. Therefore there is no tax. And in some situations (like when a borrower files for bankruptcy or is defined as being insolvent) they may not be taxed for debt forgiveness on a recourse loan.
Anyone who is facing this type of situation needs to consult a knowledgeable tax attorney and accountant to get the straight story and prepare the most cost-effective strategy.
ParticipantGreat points from Allan and stansd.
I would guess that most of the holders of investment-grade MBS tranches are going to be fine, depending obviously on the financial engineering employed in carving up the original pool. I do think it’s prudent to be mindful of the possibility of the defaults eating their way up into the highest rated tranches.
The fallout from wiped-out non-rated tranches has the potential to fantastically exceed the value of the original MBS tranch. This is where the most imminent problem lay. With each successive generation of derivatives, the risk increases greatly. This is why we must look beyond the market segment of the original MBS tranches that are in trouble.
It is an unbelievably thick wicket. Even street insiders don’t know who is holding CDO’s and how many generations of derivatives are out there. The behind the scenes manuevering has got to be incredible. Hopefully we’ll get a good book on this stuff down the road.
ParticipantGreat points from Allan and stansd.
I would guess that most of the holders of investment-grade MBS tranches are going to be fine, depending obviously on the financial engineering employed in carving up the original pool. I do think it’s prudent to be mindful of the possibility of the defaults eating their way up into the highest rated tranches.
The fallout from wiped-out non-rated tranches has the potential to fantastically exceed the value of the original MBS tranch. This is where the most imminent problem lay. With each successive generation of derivatives, the risk increases greatly. This is why we must look beyond the market segment of the original MBS tranches that are in trouble.
It is an unbelievably thick wicket. Even street insiders don’t know who is holding CDO’s and how many generations of derivatives are out there. The behind the scenes manuevering has got to be incredible. Hopefully we’ll get a good book on this stuff down the road.
ParticipantThe subprime MBS debacle, if you care to dive into it, is just another example in a long history of examples of shady Wall St manuevering to the detriment of unwitting (and therefore somewhat culpable) investors. For anyone who is truly interested in a behind the scenes look, a great and easy to digest start would be Michael Lewis’ book “Liar’s Poker”. It is particularly relevant to the existing market as the book, in part, discusses the origins of the mortgage bond market. It is very entertaining and by no means a dry read.
The real problem with the CDO’s is that they are rarely traded and hard to value. Pick a number, any number. And now that BS’s creditors have seized what – a billion dollars’ worth? – after a margin call, you have the creditors trying to sell these assets that no one has any idea how much they are really worth. Not good. And where is the poor investor in the mix? Tied to a concrete block at the bottom of the Hudson because BS suspended redemptions. Excellent! I think a key question now is are the creditors going to come on full force or are they going to sit back and let BS try to work some shady magic?
The game being played is really nothing new. The only question is what effect will we see on the greater market and economy. Will it be like a mortgage bond-junk bond-S&L crisis or will it be more contained. I really don’t know but it’s going to be an interesting show.
Oh, and it’s “tranche”.
ParticipantThe subprime MBS debacle, if you care to dive into it, is just another example in a long history of examples of shady Wall St manuevering to the detriment of unwitting (and therefore somewhat culpable) investors. For anyone who is truly interested in a behind the scenes look, a great and easy to digest start would be Michael Lewis’ book “Liar’s Poker”. It is particularly relevant to the existing market as the book, in part, discusses the origins of the mortgage bond market. It is very entertaining and by no means a dry read.
The real problem with the CDO’s is that they are rarely traded and hard to value. Pick a number, any number. And now that BS’s creditors have seized what – a billion dollars’ worth? – after a margin call, you have the creditors trying to sell these assets that no one has any idea how much they are really worth. Not good. And where is the poor investor in the mix? Tied to a concrete block at the bottom of the Hudson because BS suspended redemptions. Excellent! I think a key question now is are the creditors going to come on full force or are they going to sit back and let BS try to work some shady magic?
The game being played is really nothing new. The only question is what effect will we see on the greater market and economy. Will it be like a mortgage bond-junk bond-S&L crisis or will it be more contained. I really don’t know but it’s going to be an interesting show.
Oh, and it’s “tranche”.
ParticipantPR,
I was in SD from ’85-87 and then ’91-present so I was here for the majority of that cycle. I actually worked in the finance industry at that time. The banks, regulatory agencies and interest groups were not mobilizing as they are now.
In the early ’90’s, SD lost about 60K jobs in a very short span of time. Unemployment was screaming upward toward 8%. The S&L crisis was in full effect. Things were pretty bad here. It wasn’t a matter of a homeowner not being able to afford a re-cast payment – alot of people couldn’t afford any payment at all because they were out of work.
I think what we are seeing now from almost all camps is just more reinforcement of the lending universe’s well-established position on owning homes – aka – they don’t want your house. They don’t want to foreclose. Particularly if you are upside down. They want to keep you in that house and keep those payments rolling in.
I believe there is an immense difference between someone who cannot pay their mortgage because they are unemployed and someone who is employed but cannot afford a higher re-cast payment. In the latter case, there is something there to work with. Re-casts can be postponed. Mods into a fixed rate can be made. There are options. As long as there is employment and income and some level of capability, there are going to be options.
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