U.S., Banks Near A Plan to Freeze Subprime Rates

[jk]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

The powers of foreclosure are in the hands of the beneficiary of the note. I think what happened these notes had beneficiary assignments recorded and that transferred the powers to a new beneficiary voiding the trustee powers of the banks(trustee). The note may have been assigned to a new beneficiary many times and the trustee will have to go back and have the current beneficiary grant foreclosure powers. What a note flipping mess.

what if the note has been chopped to pieces, with the first year's cash flow going to tranche a, the second year's to tranche b, etc? i think part of the issue is that the buyers of the cdo tranches think they own something but they don't, ownership is said to have stayed with the cdo adminstrator. but the cdo administrator doesn't necessarily have the same interests as the beneficiaries of the cash flows. or, on the other hand, different beneficiaries may have different interests and desires, and the administrator wants to maintain business relations with them all. it's quite an impressive mess.

[Sapiens]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

it's quite an impressive mess.

Opportunity, opportunity!! I smell opportunity, there's lots of ---Wealth to be earned!

[bill]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

what if the note has been chopped to pieces, with the first year's cash flow going to tranche a, the second year's to tranche b, etc? i think part of the issue is that the buyers of the cdo tranches think they own something but they don't, ownership is said to have stayed with the cdo adminstrator. but the cdo administrator doesn't necessarily have the same interests as the beneficiaries of the cash flows. or, on the other hand, different beneficiaries may have different interests and desires, and the administrator wants to maintain business relations with them all. it's quite an impressive mess.

The beneficiary ultimately holds the power. If it is multiple then follow the note assignments. Any side agreements do not hold powers of foreclosure they will just have to get in line at the foreclosure procedure.

[EJ]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

Returned last night from a NYC trip. Among my interviews, a 25 year Wall Street hedge fund manager who told me this was coming today. He expected price controls on home mortgages and here they are. The short term objective is to float bad debt, as the Bank of Japan did in the early 1990s. It's the usual government response to a real-estate based credit and banking crisis. The long term problem is that government intervention to stop normal market price clearing is that economic activity declines and commercial and financial failures follow.

Also met with the head of the largest investment bank in the middle east. They have quite an oil boom going on: the GCC has increased from $120 billion in 2000 to $1 trillion in 2005. The investment fund presentation included a peak oil slide, and this ain't Matt Simmons.

Was interviewed for an hour by German public radio. Unlike US counterparts, my interviewer has a PhD in economics. The questions were very good and she understood the answers.

Details to be published in the Select area later.

[hugh_lawson]

Dissertation

Fred
Thanks for the link to the speech, but I meant his actual dissertation on the great depression. Know where I can find that?

[Rajiv]

Re: Dissertation

Here it is - Bernanke Thesis

[SeanO]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

what if the note has been chopped to pieces, with the first year's cash flow going to tranche a, the second year's to tranche b, etc? i think part of the issue is that the buyers of the cdo tranches think they own something but they don't, ownership is said to have stayed with the cdo adminstrator. but the cdo administrator doesn't necessarily have the same interests as the beneficiaries of the cash flows. or, on the other hand, different beneficiaries may have different interests and desires, and the administrator wants to maintain business relations with them all. it's quite an impressive mess.

JK - I don't think it is this complex. The holder of the note is whomever was named when the note was signed by the borrower. And that entity can assign that note to anyone they want at anytime. How the loan was originally or subsequently funded has literally nothing to do with it.

The issue in Florida is that the folks servicing the loans for the entities which hold the notes have been taking some latitude in their filings. Forcing them to track down the note (or file an affidavit of lost note), complete any missing assignments, and then file a substitution of trustee may slow them down, but I think it is closer to minor speed bump than impressive mess.

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On the proposed rate freeze we'll have to see the details, but I don't personally think it will have much impact on the overall foreclosure outlook.

I have yet to see anything that details whether it is a freeze in the payment rate of the interest rate. Many of the teaser rate loans have a low initial payment rate, but an average or high interest rate - both of which adjust. Freezing the interest rate won't stop huge payment shock for folks with teaser rates. And even if they freeze the payment rate the loans all have neg-am triggers that only allow the principal balance to grow so much. Unless this freezes the payment rate AND curtails the neg-am triggers it won't help much.

Even then, it won't help those that were speculating and never could afford even the teaser payment. It won't help folks who have run into hard times and can't sell. And it won't help keep folks who are upside down from walking away, which I personally believe is a significant portion of the current foreclosure problem. KB Homes recently auctioned off new homes in Manteca, CA for $390k where the same models previously sold for as much as $680k. CA is essentially a no-recourse state, and a lot of folks put nothing down, so their choice is bad credit for 7 years, or making payments on $290k of fictitious value. My bet is that most of those folks walk.

Sean

[jk]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

JK - I don't think it is this complex. The holder of the note is whomever was named when the note was signed by the borrower. And that entity can assign that note to anyone they want at anytime. How the loan was originally or subsequently funded has literally nothing to do with it.

The issue in Florida is that the folks servicing the loans for the entities which hold the notes have been taking some latitude in their filings. Forcing them to track down the note (or file an affidavit of lost note), complete any missing assignments, and then file a substitution of trustee may slow them down, but I think it is closer to minor speed bump than impressive mess.

let's say the note was assigned to an mbs. the mbs was then sold to be used as an input to a cdo. the cdo trustee sells claims to various payment streams. assume the equity tranche is toast. i'm just wondering if there are situations in which the mezzanine buyers have interests in conflict with the "aaa" tranche buyers.

On the proposed rate freeze we'll have to see the details, but I don't personally think it will have much impact on the overall foreclosure outlook.

I have yet to see anything that details whether it is a freeze in the payment rate of the interest rate. Many of the teaser rate loans have a low initial payment rate, but an average or high interest rate - both of which adjust. Freezing the interest rate won't stop huge payment shock for folks with teaser rates. And even if they freeze the payment rate the loans all have neg-am triggers that only allow the principal balance to grow so much. Unless this freezes the payment rate AND curtails the neg-am triggers it won't help much.

Even then, it won't help those that were speculating and never could afford even the teaser payment. It won't help folks who have run into hard times and can't sell. And it won't help keep folks who are upside down from walking away, which I personally believe is a significant portion of the current foreclosure problem. KB Homes recently auctioned off new homes in Manteca, CA for $390k where the same models previously sold for as much as $680k. CA is essentially a no-recourse state, and a lot of folks put nothing down, so their choice is bad credit for 7 years, or making payments on $290k of fictitious value. My bet is that most of those folks walk.

Sean

analyses i've read are consistent with your view, sean. it is only a subgroup of subprime buyers who would be helped. roubini, writing at his blog, assumes that the "frozen" notes are not neg-am and implicitly assumes it is the payments as well as rates that are frozen for 5 years, so that there is definitely a reduction in the present value of the notes. this is the haircut he assumes for the lender [or, more accurately, the note purchaser]. even then, if the property "owner" has to sell because of personal circumstances - divorce, ill health, relocation, etc - there is a problem if the note is in fact underwater.

[SeanO]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

let's say the note was assigned to an mbs. the mbs was then sold to be used as an input to a cdo. the cdo trustee sells claims to various payment streams. assume the equity tranche is toast. i'm just wondering if there are situations in which the mezzanine buyers have interests in conflict with the "aaa" tranche buyers.

No doubt it could get complicated underneath - but not with regards to the note itself, or foreclosing on the note. Either they produce the note and the assignments, or they do an affidavit of lost note, with some proof that they are the holder in due course. Again, where the money came from, or who has an interest doesn't matter unless it got codified on the note itself - which I seriously doubt.

I should also note that there are two completely different foreclosure systems - judicial and non-judicial, and that rules vary a great deal by state. I don't expect this to become an issue at all in predominently non-judicial states like CA.

analyses i've read are consistent with your view, sean. it is only a subgroup of subprime buyers who would be helped. roubini, writing at his blog, assumes that the "frozen" notes are not neg-am and implicitly assumes it is the payments as well as rates that are frozen for 5 years, so that there is definitely a reduction in the present value of the notes. this is the haircut he assumes for the lender [or, more accurately, the note purchaser]. even then, if the property "owner" has to sell because of personal circumstances - divorce, ill health, relocation, etc - there is a problem if the note is in fact underwater.

It will be really interesting to see how it helps. One telling sign will be whether or not defaults jump from the rise in ARM resets in October. If ARM resets really are a significant cause we should see a corresponding uptick the next couple of months given that folks have to miss a couple of payments before the default is typically filed. If not, then I don't think the "freeze" will have any measurable impact.

Unfortunately even if we see that uptick it probably isn't safe to say that ARM resets are causal as August's withdrawal of liquidity could also be the culprit. I don't see an easy way to tell the degree to which each contributes. If we see no increase in defaults from either of these, it would be really good sign.

Sean

[c1ue]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

Sean,

Do you know or have access to any data on how long typical defaults occur after rate resets?

I'm just wondering because I believe most people will do all they can to hold on to their 'appreciating asset' of a home.

[touchring]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

Was there a precedence for a rate freeze in America? I've never seen it done in Asia during the last financial crisis.

Any form of anti-capitalist capital controls will be counterproductive and chase off investors and funds.

[c1ue]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

Touchring,

Everything that has happened in other countries has also happened in America at some point.

In the Great Depression early stages, there were also price controls, interest rate collusion (not by government though), and so forth.

Don't drink the Kool-Aid that says everything in America is new and different and better - use your own judgement.

I've got some really cool Tsarist books with accompanying Communist texts that amply illustrate just how the 'truth' changes depending on who is in power.

[SeanO]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

Sean,

Do you know or have access to any data on how long typical defaults occur after rate resets?

I'm just wondering because I believe most people will do all they can to hold on to their 'appreciating asset' of a home.

I have not seen any data at this points that correlates resets and defaults. I personally think its quite possible that resets have not been the major factor in defaults to date.

Sean

[c1ue]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

SeanO,

Thanks for the feedback.

I personally agree - the foreclosures to date have very little to do with recent resets.

The foreclosures mid to late next year - different story.

[lb]

Re: U.S., Banks Near A Plan to Freeze Subprime Rates

This will never happen. It would literally wipe out billions of dollars, as the lower tranches (who knows how high) would instantly become worthless. I don't mean mark to market worthless, I mean mark to model worthless.

Without resets, the models are junk. That amount of defaulting MBS's would move us from systemic problems to systemic failure in about 90 seconds.