questionable assets. The slide is not easy to read. It can be found in
the 2009 Second Quarter Supplement, on page 5.
The
report describes FNM’s exposure to problematic classes of mortgages on
their book. That total comes to a whopping .9 Trillion. The total book
of business is $2.7 Trillion, fully 32% of their book is troubled.
The report muddles with the actual holdings, as there are overlaps in the descriptions. The actual numbers they provide include:
Negative Amortization Loans: $15b
Interest Only: $196B
Low Fico: $328B
LTV>90%: $265B
Alt-A: $269B
Sub Prime: $8B
Those
numbers add up to $1.2 trillion. What this means is that 50% of the bad loans on the books are troubled for two reasons. For example, $25 billion are
loans that have high LTV and a FICO score less than 620. (AKA a “stinker”)
What
might this mean? Some trends are emerging on this. Based on private
sector experience with these types of troubled loans one could expect
that 50% of these borrowers will go into default. On the defaulted
loans the losses will be about 50% of the outstanding loan balances. In
other words, losses of 25% on the troubled book are reasonable
assumptions. That would imply a loss over time on these loans of $225b.
And that does not include losses on Prime loans. And that is just Fannie.
The Administration has an estimate of
$250b over four years for the full cost of cleaning up the Agencies.
These numbers suggest it could be double that. No wonder Mr. Lockhart
left.
Good call, geniuses. FRE & FNM arte flying today. Loans are performing much better than all the conspiracy theorists predicted. FRE needs not anymore gov money. Yep, its the end of the world. Tin foil group think.
A bank holding a certificate of deposit of mine just got served with a TARP search warrant from the FBI. I hope Sheila has a little more in that FDIC fund. Colonial Bank will be the sixth-largest American bank seizure in history.
Much too large for the FDIC to swallow whole.
When talking with a local branch manager of Colonial Bank, he said that their niche market was commercial real estate. The first bank to implode over bad CRE loans? More likely to me was a failed buyout of Colonial by a high volume mortgage originator (also served by the FBI SIGTARP squad).
http://www.ocala.com/article/20090803/NEWS/908039996/1406/NEWS?Title=FBI...
my first post! :-) ok let's see, instead of getting involved in the problem, which after all took decades and ten of billions of dollars in "bonuses" to realtors, valuers, lawyers, regulators, rating agencies, securitizers and investment bankers to create, why not estimate what a "correct" consumer balance sheet should look like, and what capital at a "correct" bank should look like with a balance sheet made of home mortgages, loans and that risky punting, own account stuff?
I rebase things back to 1985, avoiding taint and come up with a correct average house price with 2% price inflation of $130,000 against the current median price of $206,000 and average house price of $277,000, so on this premise, prices have a further 40-50% to fall. I square this off against what the average family can actually afford, given that retirement now costs around $400,000 per person to cover living and health costs, that is almost one and a half times current median or three times the cost of an affordable house.
There is a bit of reference in the blogosphere to this link claiming that the effect on GDP of correcting the consumer debt to GDP of 130% is a tiny 3/4% per annum on consumption. By my reckoning, we need a savings rate of 35% per annum for the next few decades and GDP around 20-30% lower to correct past excess, but here is the link.
http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html
Going back to me "what should a bank look like" case, I want to come up with sustainable bankbalance sheets of mortgages, loans and spec trading. Sofirst, let's focus on an average household. By my reckoning (use your own numbers everywhere) the average household income is around $35,000 a year, taxes are around 15%, expenses (nappies, insurance, cars to food and utilities) take 300 a week (ugh, is that all?) so 45%, leaving the two largest ticket items, the house and retirement living (including health care) to be determined. Let's work back the retirement bit and work out the affordable mortgage bit, and hence median house price from here. Then we can get to the "correct" bank balance sheet! Ok, sleight of hand and twist of fate, bed of nails, yaddee yaddaa. I reckon you need $25,000 to cover pension and health in retirement, that means the average person has to have around $400,000 in order to generate $25,000 to "die on" over 20 years in retirement. With these numbers if you have 40 years to pay-off a mortgage what kind of house could the average person afford? I will make a simplyfying assumption that the gap of 15 years between retirement contributions 40 years and mortgage repayment 25 years, allows for (gulp) a bigger house or an extra kid. By my calcs, the maximum house mortgage that could be afforded for the next 25 years is around $87,000. That takes us back to 1985 in nominal prices, http://www.census.gov/const/uspricemon.pdf
leave aside the fact that things may or may not be cheaper, wages costs aren't but materials should be the unchanged part of building costs. For banks to be "correctly" restructured, then the average mortgage needs to be around that number within securitised RMBS financed by the Fed, FRE and FNM. The current median house price is $202,000 and the average us $276,000, ergo the further 40-50% fall. Other assumptions are illusory. Ok, so that reconciles the average house price to a fall of say, 40% from here, with the value of mortgage securities that haven't already discounted such a price in the hole for that kind of hit. (One might argue about why the finance industry doesn't focus on the provision of the magic $400,000 retirement pot, but let's leave that aside for the next round of aggressive marketing).
Next I was going to talk about loans. I don't think I know enough about this market and I am going to trust market prices and clearing mechanisms and make the loan process an efficient place that clears risk and returns (with all the usual covenants etc).
So we are left with the size of the risk book. I take the view that the regulators (including OTC, derivatives, stock exchanges, swaps, FX limiters) should offer a maximum short/long facility at the aggregate level per participant that is the same for all participants, with no differentiation for size. Each insitution and individual already has limits, internal ones. These should be brought into line to engender a level "maximum" playing field. That is, JP Morgan cannot exceed (across its entire book of bonds/stock/derivatives/fx/commodities) to more than an agreed VaR money limit against its paid up capital and that limit should coincide on a pro-rata basis with any other investor. Maybe Goldmans VaR limit is rational to Goldmans, but it should be regulated and equitable.
Thus endeth the first post!
Here we go again...2007-2008 rinse and repeat, Deja Vu all over again, this ain't our first dog and pony show...it's just a matter of a very short time children, the fat lady's in the green room doing her breathing exercises, soon to appear stage left (or was that stage right).
Just wait until more and more people start co-habitating. I'd like to see that projection on rent values and the mortgage market. Believe me, it's another factor to be considered at some point in time with this ugly spiral.
We are so freaking doomed!
So much for the crisis being limited to $100 Billion (hello Benny, are you reading here?). The RMBS and CMBS is a CAT 5 spawning F5s - unforeseen destruction until the storm clears (3-5 years and we'll peer out of the storm cellars).
Mr. Lockhart's job was to stuff every last POS possible in. Now that we are on the cusp of another modified limited hangout of the mess, which will require congressional appropriation and a bit of the old ritual 3 hour hearing/beating before the give up the coin, he just left so he could avoid some of the flak.
Again on this MI stuff. One of the players in the MI space is Triad. Their results today. You think that Fannie is protected from loss from these folks. Forget it. They are going out of business.
Triad Guaranty's second-quarter loss widened on rising loss-adjustment expenses, as revenue climbed slightly and net settled claims more than doubled. Shares were volatile in the after-hours session and most recently were down 35% to 89 cents.
And the hits just keep on rolling at WFNM..
Thanks for the great analysis.
Where can I buy stock of the company that delivers the paper that the FED uses to print new dollars with? :)
www.moneyfactory.com and its actually cotton no paper
may be good to go long cotton ...
I love that site! You can buy money for more than it's worth from the gift shop.
"none of this matters. The markets will continue to soar. Zero Hedge is sour grapes."
Was it a Sour Grape that hit Chicken Little?
Thats like saying in Vegas "the winning streak will continue". The NYSE is nothing but a big Casino anyway.
Last winter I predicted 10,000 DOW on an ATS thread. I'm beginning to believe my own prediction!
Apparently Karl Denninger lost $4M underestimating the ability of the FED/PTB/ bubble machine to blow one more!
As for the MI. Don't hold your breath. They are all busted. One of the biggest providers of MI is United Guaranty. This is a sub of our buds at AIG. Look at this catagory in the slide $265bil. That is 10% of the total. Now look at the default rate on this stuff. Second highest. What is happening to these beauties is that the loss is 50%. So Ins. pays (late) 20% FNM still loses 30% on loan balance in these deals.
More on post soon on the MI and this report.
http://investing.businessweek.com/research/stocks/people/person.asp?pers...
http://www.ubs.com/1/e/investors/corporategovernance/boardofdirectors/si...
much higher than 265B - that is only >90. they need MI on anything over 80, and on the alt a stuff, bought MI on anything over 50. the MI industry has over 950B of inforce insurance, I think they have quoted 80% of that is to the GSEs, and assume Fannie has 60% of that (rough guess), that would put the MI insured loans at 450B or so. seems about right to me. way more than 265B, and all covered by BB counterparties. wtf is the point?
btw, on the pool coverage, fannie is paying for that coverage itself. so when those policies were written, they paid for AA coverage, and now, they are still paying the same rate, for BB coverage. fucking insane.
i'm lost now....what is the net to bruce's
original analysis? i.e. given the impact of
mortgage insurance what is fannie's net loss
vis a vis bruce's numbers?
i.e. to what extent will mortgage insurance
soften the blow?
then the question becomes how much of a wipeout
would that be to the mi sector?
That is what I am curious about - are they haircutting the MI coverage? I guess I could look myself, but am too lazy...
Of course, for their BB coverage, the MI industry INCREASED their rates. So the poor schmuck taking out the mortgage is the one who gets screwed - again. Pay more for MI as if the GSEs get down-to 65LTV coverage, but Fannie/Freddie charge more in delivery fees for an MI loan versus a 65LTV loan because they don't think the MIs are good for it.
A total fucking scam that the govt allows to continue. Fucking criminal, really.
Rome is burning!
A little help please. Can someone give me indicative pricing for these classes of mortgages? Assume that they were sold in the secondary market. What would $25b of 100%LTV / <620 FICO trade for?
Tks. BK
9.1% of neg am loans had FICOs < 620?
Crazy.
Yo... You need to diversify u'r bonds nigga....
That Chappelle skit was hilarious..
Bruce, you forget one thing - mortgage insurance. In their credit book, ANY loan over 80LTV need MI. For the flow business, coverage usually takes them down to 65LTV (original).
In the bulk business (much of the Alt A and Option ARMs), it is MUCH more complicated. The got modified pool coverage, which means they got loan level coverage down to 50LTV, but subject to deductibles and stop losses, depending on the pool.
Generally these stop losses were pretty low (300 - 400 bps), so they should blow right through them, at which point, 100% of the risk goes back to Fannie.
To complicate things even further, the MIs are in horrible shape, and one of them, TGIC (who covered a lot of mod pool risk) is paying claims at 60cents on the dollar. I haven't gone through Fannies announcements, but I would be curious if they are applying a haircut to the MI coverage. The "surviving" ones have IFSR of BB for the most part, hardly strong counterparties.
Looks like I picked a hell of a week to quit sniffing glue.
So with the recent reports that state 48% of mortgages will be underwater and that the majority of option ARM + Neg Amor. mortgages will reset in Q3 '10. The Goldman domination plan becomes clearer.
Pump the equity bull till into next year . Then when you can't possibly be any more short, pull the Geithner puppet string/trigger and watch the world burn.
Geithner will "realize" banks + unemployment are not healthy and the stress tests were way off the mark. Banks will be seized and the second wave down will begin.
none of this matters. The markets will continue to soar. Zero Hedge is sour grapes.
Bad Bank. Hahahahahh.
I think the morons have lost the plot. Bubbles burst.No matter how hard you try the "Gas will come out from the bloated stomach"
There was a story in the Washington Post headlines yesterday about creating a bad bank for FNM and FRE to give them a new start.
WaPo cited "government officials" saying the fan/fred bad bank idea was one being considered at a meeting of the National Economic Council yesterday.
The press secretary shortly after issued a non denial saying "The story out today is light years ahead of any decision-making process here...Safe to say that many senior administration economic officials learned of this proposal sometime this morning ."
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/05/AR2009080504063.html
http://www.reuters.com/article/marketsNews/idUSN0633536320090806
Glad to see there is also some quality analysis with indepth knowledge being applied on the zero hedge blog.
Was that a compliment or an assurance about this blog's authenticity. Go,show your smartarse" somewhere else. Don't ever say these stuffs on facts. What has been reported are just facts.
We are worried about the biggest fraud of the millenium that GS,JP and BB's dramatic troupe are unlishing on the world economy.
Thanks anyways.
OUCH--that's some wickedly poor English stuffs you just unlished. And that's a fact!
Iceberg Dead Ahead !!!
Yeah! And we are all sitting on the lower decks of the Titanic (unless you work for Goldman Sachs).
Congress might want to think about increasing the national debt ceiling higher than what has been requested... I don't think everything has been "all factored in" as CNBC would say.