Category: Lending (page 44 of 56)

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

I’m kicking this one up to the top, in honor of today’s events.  It’s a historical look about the early MBS markets.  Now before you jump me for my incorrect conclusion, I didn’t realize that the hedge funds leveraged their loan holdings 10 to 1 (or more).  That “38 bucks a month” translates to a loss of about 6%.  In hindsight, with full knowledge of the leverage employed, I’d  have thought that your “IRA” would lose half its value.

Enjoy!

BAD LOANS: Buried In The Back Of The BreadBox

Let me tell you a story about how the subprime mortgage market collapsed and millions of baby boomers had to accept less money in retirement. If you liked the Da Vinci Code, you’re gonna love this one. It’s not wrapped up in sex, or murder, or corruption, just good-old fashioned “pass the buck” and “what the little guy doesn’t know won’t hurt him” attitudes.

WARNING: If you are prone to believe conspiracy theories, you are going to curse, kick the cat, and be extremely pissed off after you finish reading this.

Here is the dirty little secret of the mortgage securitization boom of the last 5-10 years: The little guy gets stung with the losses.

First, a little history lesson. It’s kind of boring but stick with me here. Mortgage backed securities (MBS) were originally the old Ginnie Mae pass-through certificates. The VA or FHA packaged up their loans and sold them through Wall Street to little old ladies who wanted to “juice up the yield” on their portfolio. They were safe because they were backed by a government agency. They yielded more than treasuries because they were a conglomeration of various mortgages. The money was loaned at, oh… 14% (remember the early 80’s ?) and the investors received, say…12%. It was a good deal because the little old lady could only get 9% on Certificates of Deposit. The difference was spread among loan servicers, Wall Street, and even the gub-a-mint agency by employing this securitization tactic.

The problem was that loan principal was returned, along with the interest, on the old Ginnie Mae pass-throughs. Little old ladies Read more

by Tom Vanderwell

Mortgage Officer

Author website

Since I’ve already had almost a dozen e-mails, phone calls and tweets asking me, “So how does the financial meltdown on Wall Street impact me as a Realtor?”   I thought I’d take a few minutes this morning and throw out some observations and thoughts of what it might look like.

Before I do, let me remind you that we are in what could truly be called a historical (in a negative sense) event and therefore any prognostications are exactly that and it’s going to be interesting to see.   But here’s what I see as some potential ramifications for the real estate markets:

1. Mortgage rates – due to the increased “danger” and perceived lack of safety in the stock markets, I think we’re going to see a major “flight to quality” as people pull money out of stock and into bonds.   And, because Fannie and Freddie are now owned by the government, we could see a pretty nice drop in mortgage rates because of it.  I also believe that rates will drop because (see #3) of the anti-inflationary pressures.

2. Non-agency loans – by Agency, I mean anything that is bought by Fannie, Freddie, FHA and VA.  I believe that the death of Lehman and the forced sale of Merrill (as in, sell or die) are going to be, in many ways, the death knell (for the time being) for non-agency loans.   If a bank can’t sell it on the secondary market (and the only secondary market that’s left is Fannie, Freddie, FHA and VA), then they won’t do it or it’s going to be very expensive.   Now, there will be small exceptions to that where you have small community banks who are willing to do some creative portfolio stuff, but that’s going to be the exception rather than the rule.

3. Cash is king in the financial world – we’re going to see a tightening of credit in all forms of lending where it is being done with the bank’s own money.   Commercial loans, equity lines, car loans etc. are going to be harder to get and more expensive.   This will have a negative Read more

by Tom Vanderwell

Mortgage Officer

Author website

One of the important things that Paulson said in the press conference yesterday was that we (the government) don’t want Fannie and Freddie to stay public and that one of the things that the next administration and Congress has to figure out is “How in the world do we take them private again?”

In light of that, I thought I’d repost what I original wrote on July 22, 2008 about a potential bailout.   Not because I think I was right, but because I think we need to start thinking and talking about what happens now.   I certainly don’t want the Federal government “mucking around” in the mortgage world for a long time.

What do you think?

Tom Vanderwell

July 22, 2008  Barry Ritholz at The Big Picture had these two comics that brought to the forefront again the issue of moral hazard.   Check out the comics and then we’ll talk “on the other side.”

Okay, now some thoughts about moral hazard:

The definition of moral hazard (as taken from that scholarly journal, Wikipedia):

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

Let’s break that down and look at it a little more closely in light of the current market environment:

a party insulated from risk may behave differently…. What that means is that, frankly, the people on Wall Street and the bankers on Main St. (including yours truly) might very well have done things differently over the last few years if we had been more fully exposed to the risk.  Will Fannie or Freddie buy it?   That’s all that most mortgage lenders really cared about when structuring a loan.   On Wall Street, the guys (I’m using that term in a gender neutral sense, okay?) who packaged these loans up and sold them as securities didn’t really care Read more

by Tom Vanderwell

Mortgage Officer

Author website

I promise I won’t take up so much space on here after the dust settles, but I’m having a hard time getting my mind around the enormity of what’s happening with Fannie and Freddie and what it means, so I figure the best thing I can do is share what I know with others……

I came across this article in the Wall Street Journal which lays out a good “story” of what has transpired.   I’m going to copy excerpts of it, but I’d urge you to read the whole thing…….

WASHINGTON — In the end, Fannie Mae and Freddie Mac had no choice.

Summoned to separate meetings on Sept. 5 with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.

“We have the grounds to do this on an involuntary basis, and we will go that course if needed,” Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.

There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy.

The decision was hashed out over weeks of meetings…….

In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies’ regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn’t survive as currently structured. …..

Inside Treasury, the hope was that merely receiving authority to backstop the two companies would comfort markets enough that they could raise capital on their own. ……..

Two things would soon force Treasury’s hand. Uncertainty about Treasury’s plans and how any intervention would affect shareholders caused shares of Fannie and Freddie to fall sharply, making it all but impossible for them to raise equity. At the same Read more