I know all about independent credit approval and officers involved in that area. Believe it or not when I structure a $200m securitization deal I have to write a credit application discussing the company and the structure. This then goes to an independent credit commitee where I have to get approval, sometimes it has to go to two different international sites depending on the credit type, quality, structure and amount. Even with this credit approval it has to be looked at by the Rating Agencies who determine what types of additional credit enhancement it has to have before it is put into our conduit. These credit enhancement, which includes a bank committment and a Letter of Credit, which provides additional support for the conduit if credit declines too much.
Thus, I have to know every company in and out and every structural feature, down to the delinquency ratio for the last 6 months, in my head. I then have to stick with each credit, checking every servicer report month by month, investigating any changes in credit quality, looking at individual line-item in a 200+ line servicer report. This happens for anywhere between 1-8 years, which is our longest deal. On top of that, I have to keep on top of any credit amendments, voting requirements, annual reviews, and annual due-diligence where I fly out to meet the company.
I have to live and breath a 100M+ deal every month of my life for multiple years and I have to know everything about it.
I know credit better than most people because I don't underwrite and spin-off. You can get off your fekkin high-horse and stop trying to think that you're the only one who deals with debt. In fact, you can just step down and STFU because, unlike you, I actually continually deal with this rather than just spinning it off.
theeedude
Lifer
- Feb 5, 2006
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That is true, but this time, the cheap credit contributed to the bubble in a big way. At least with Internet stocks, people lost money they had, not gotten themselves into debt up their neck. Can you imagine how much worse the tech bubble would have been if banks were allowing people with poor credit to borrow hundreds of thousands of dollars to dump into Internet stocks. Well, you don't have to imagine it, because that's exactly what happened with housing. You don't have a leg to stand when calling me names for shorting real estate. The RE shorts are not the problem, we are the solution. The bubble and those who helped create it are the problem here.
Vic
Elite Member
- Jun 12, 2001
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Well (taking your usual pompousity at face value and assuming you're actually telling the truth for once), your group should be the ones to deal with it, O Mighty Internet Cage Fighter. You wrote the guidelines as to what was saleable and what was not.
theeedude
Lifer
- Feb 5, 2006
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It doesn't matter where they got it from. It still doesn't excuse their loose lending practices. It is irresponsible to loan out money to people when it's clear that the loan you are giving out is very likely to cause them severe financial hardship in a few months. A consumer may not be sophisticated enough to evaluate all the risks, but the banks have no such excuse. They did a disservice both to the borrowers who will likely go into foreclosure and to the buyers of those mortgages who will have to absorb the loss from a defaulted mortgage, because the banks did not do an adequate job prescreening borrowers. So if you want to see who was profiting from people's hardship, it's the loan brokers.
no, it was dropped from a helicopter.
To place the blame solely on brokers is kind of silly. The whole system was setup so that everyone profited on the front end. As a result no one cared about long-term or the risk of defaults.
Not having worked on an MBS deal before and not having any MBS conduits in our structure, but I can make some guesses.
MBS structure must be akin to some of the other mortgage-ish products I have worked with in the past. As such, there are limited eligibility criteria built into the deal. Those criteria are nothing more than gross pool-based metrics, they do not discuss or even get as granular as you think. For example, more general criteria would be "Originated within the standard company Credit and Collection Policies and Procedures". Other ones that are more specific would be "Cannot be a Delinquent Contract", which normally is 30+ days late past invoice. Another standard one is "Cannot be a Defaulted Contract", which normally would mean a 120+ day delinquent contract, or one that has been otherwise written-off due to bankruptcy or breach of Representations and Warranties. Many deals have seasoning break-offs, FICO floors, or have dynamic enhancement rate calculations or over-concentration factors for loans of specific types (geographical or obligor concentrations). However, the very nature of the pool system dictates that small numbers of bad loans are diversified away through the gross pool.
The very nature of a pool based structure minimizes the need for specific obligor investigations. Normally a statistical sample is taken during the Agreed Upon Procedures (AUP) by an independent auditing firm. It will take a look at a pre-determined amount of contracts to and check them against the physical loan files (whether those be imaged or paper) and compare them to the loan servicing portfolio. For a pool of 30,000 loans, that might amount to maybe 200 loans.
If those 200 randomly sampled loans have no material problems the auditors issue a letter stating that there were no material findings. If there is a systemic problem it can be traced. If it is later found that the loans were in breach of the R&W, they must be repurchased by the Servicer/Seller.
Once the pool is determined information on delinquencies and defaults are used to stress the structure to set optimal enhancement levels, which determines how much money the seller will get up-front. These rates are overseen by the Rating Agency to determine adequacy. The RA then issues an opinion on the rating which investors may or may not agree with.
Through this whole period it is up to the Seller to maintain the status of their pool. The collateral is girded by the power and solvency of the servicer. Gross portfolio attributes, such as CLTV, FICO...etc are known. However, the ability to pay for the actual loan, such as debt/income ratios are solely the responsibility of the Servicer Seller, who must follow the R&W of their credit policies. This is where the problem lies. If the S/S does not abide by their policies they are material breach of their covenants and can be held liable. However, this is usually futile.
The biggest problem is the determination of the CLTV and the usage of Option Arms and other exotic mortgages. RA and other parties (underwriters and such) can make estimations of the performance of the loans, but they cannot know how it will perform. Their enhancement levels are set as such.
The underwriters can to a certain degree control the make up of the pool. If they see a poor pool they just reduce enhancement and the $$ the seller gets from those loans. If the seller is so enticed to underwrite crap loans, they'll get less money. However, the underwriter still needs the best ability of the servicer to create proper loans and service them properly.
Herein lies the biggest problem. The underwriter or the purchasers have no control over the viability of that loan. That is up to the underwriter/originator to understand the nature of the property, the viability of the obligor in repayment. They are the first and middle line of defense, the last line is the structuring of the deal. They need to determine the wherewithal to repay and the ability of the collateral (house) to sustain the mortgage in positive balance.
However, those two lines failed in these cases. The last line, the structuring of the deal, hasn't performed all that well either, which isn't surprising considering the nature of the situation we were in in the last 5 years. Prolific uses of exotic mortgages and high CLTV loans resulted in a situation unseen before in the MBS market. You can only based structures on factual information, anything beyond that is an educated guess.
At no point have I said Wall Street is blameless. However, I firmly believe the first two lines is where this silliness should have stopped. Truth in Lending, reasonable credit and collection policies, reasonable underwriting, and elimination of greed from a commissions standpoint was the undermining of the system. Mortgage brokers and companies in general knew that they had a reasonable pipeline to sell loans, even if they got less money for them, so they engaged in a lot of deception, of Wall Street and also of the obligors. To deny this is to deny reality as we see these situations pop up more often.
Anything in this world can be sold, it's how much it can be sold for that's important. The Street tried to adjust as much as possible for the "how much". The "what" was supposed to be controlled by the reasonableness and integrity of the system.
Vic
Elite Member
- Jun 12, 2001
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And finally a common sense! This is exactly what happened. I think it makes LK and senseamp feel better to believe in intentional and malicious evil, kind of like some people need to believe in the 2nd shooter.
Meh... if they're looking for evil, they should look to the human ego's need to be right regardless of the consequence to others. That IMO is the cause of most of the suffering in the world.
- May 21, 2001
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Existing home sales plummet again to multi-year lows, June 2007. But this is important, prices are just below the all time high. Inventory of homes also shrank. Possible cause: people got frustrated with sales, and pulled the houses OFF the market that weren't getting offers up to expectations. Net result: lower sales, lower inventory, and higher average price of those that did sell.
theeedude
Lifer
- Feb 5, 2006
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I am not the one who started calling people names for shorting real estate. My point is that the shorts are making money by riding this RE market down to earth. They aren't the ones to blame for the bubble, the easy credit and those who offered and took it irresponsibly are.
Vic
Elite Member
- Jun 12, 2001
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That's what happened, and I called this scenario more than a year ago.
It's a common thing in the RE market for decades for many homeowners (up to half a neighborhood at times) to put out a For Sale shingle on their house every spring. If they get the price they want, they sell. If not, they pull the listing. Likewise, as the market cools, people who don't need to sell, won't.
That is just one of the many factors involved that will keep this slugging market flat to only mildly declining value-wise as this continues. Another key factor are the shorters themselves, all eagerly waiting like vultures for the proper price point to jump in on a "bargain buy." As each own of them has their own price point, they will all jump in at different times, each time stabilizing the market. That's why I've also said repeatedly that the only way that values will plummet as drastically as some are predicting would be if financing disappeared to the point that even they would not be able to acquire it.
The funny thing about this and all the arguments in this thread is that this is my own personal worst case scenario. Anyone who works in any market knows that money is made through volume and volatility. A flat and stagnant market is terrible for business. Better for me if LK was right and values plunged to the floor, then at least volume would spike to the moon with bargain seekers.
Oh and BTW, to LK. I think I know underwriting. I used to be one, Fannie cert-ed, and my wife still is one. In fact, she used to be a secondary underwriting manager, underwriting the pools as they got sent up to the Street.
Vic
Elite Member
- Jun 12, 2001
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I didn't call you "names" for shorting real estate. I was condemning your own ideological hypocrisy, and I've said so already many times.
And your argument here reminds me of a IRL discussion I had with a right-winger in March 03. I remember I asked him, "Why are we attacking Iraq?" To which he responded, "We're not attacking, we're defending." Your mentality is very much the same. Why, you're not shorting the housing market, you're "bringing rationality" to it by "riding it down to earth."
And on that note, most people, I have found, can rationalize to themselves most anything.
Tisk tisk, again with the hypocracy. You are truly the master at this, as you accuse people of personal attacks and polarization and mischaracterization of positions. I have never said that prices will fall to the floor, but you continually say I have. Please find one post asserting that, otherwise, stop playing righteous indignation every time somebody mis-characterizes your positions.
Seriously, you're like one of those little girls who picks fights and then whines to mommy when somebody fights back. You like to play innocent and threaten to have people kicked off the boards because your long-term status, but yet you think you are immune. It's pathetic that you try to leverage your elite status like that, especially when I have been here longer than you.
As far as your underwriting experience. I trust that your wife's portfolios will never degrade in quality and that her estimates on performance will never decline, because she is, of course, infallable, unlike the street. It must be rough since Fannie and Freddie have much more stringent quality standards, to adhere to them. It's interesting to note that even their credit quality standards have declined, perhaps Fannie is part of the problem? How about the accounting scandals? What about the mortgage insurance derivatives that they have so many problems valuating? Yeah, only the street is greedy, I forgot.
Perhaps if you utilized your knowledge of underwriting more you'd not go round calling names and playing whiney little girl, you might remember that underwriters of MBS do not write loans and they only buy according to reps and warrants.
There is a bank in St Louis, MO that was advertising loans where you pay the Principal first instead of the Interest first and it makes the loans cheaper. Has anyone else seen anything like this?
I will try to get the name of the bank.
I will try to get the name of the bank.
Vic
Elite Member
- Jun 12, 2001
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Which explains all your pointless name-calling and unrelated straw men arguments here, right? (i.e. I never said that only the Street is greedy while OTOH you were the one who said that the brokers -- supposedly me and my ilk -- were at fault and "should wear the stripes" blah blah blah).
Heh... if there's one thing I like about you, LK, it's that there is seemingly no argument too low for you to stoop to.
Physician, heal thyself!
Vic
Elite Member
- Jun 12, 2001
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This makes no sense at all. Nor would it really even be desirable (loss of potential tax deduction, etc.).
Plus, it's a misnomer that you "pay the interest first" on any installment loan. Provided the loan is fully amortized, you are always paying principal and interest with every scheduled payment. The reason you pay more interest than principal initially in the loan term is because there is a higher principal balance for interest to accrue. For example, you borrow $100k at 6%, interest accrues at a rate of $500 per month. Pay the principal down to $10k and interest accrues at a rate of $50 per month. In the meantime (assuming fixed rate and 30 year term), the payment was always $599.55 each month.
Originally posted by: Vic
Which explains all your pointless name-calling and unrelated straw men arguments here, right? (i.e. I never said that only the Street is greedy while OTOH you were the one who said that the brokers -- supposedly me and my ilk -- were at fault and "should wear the stripes" blah blah blah).
Heh... if there's one thing I like about you, LK, it's that there is seemingly no argument too low for you to stoop to.
Physician, heal thyself!
Again, they were the first and second line of defense. They were the ones extending the credit and many did so fraudulently.
I am not the one crying foul here. You accuse people of name-calling, yet resort to it yourself. You try to browbeat others using some sort of special status you have here, to say that if they attack you, you're going to get them banned. Yet, you resort to the same activities yourself.
I do not do that. If somebody wants to hurl insults, I'm not going to go crying, or call them unfair when I do it myself. I don't play that little whiny girl game.
Fern
Elite Member
- Sep 30, 2003
- 26,907
- 174
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That sounds like bogus marketing hype for tards, instead of something conceptually feasible.
The unpaid (accrued) interest is merely going to be added to principal balance. They'll be paying interest on the unpaid interest.
I'd really like to see the amortization schedule for one of those puppies.
Fern
Vic
Elite Member
- Jun 12, 2001
- 50,422
- 14,337
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Except that's what you're doing right now, whining like a little girl. You really should save this kind of thing for PM. But... because you had to air it out...
Look, I never went to the mods with any particular complaint against you, so I'm not sure what you're talking about. Nor have I abused my Elite status anyway (except to explain the irony of how I got it in context to your comments about me in this thread).
My issue with you here was simple: you crossed a definitive line. Personal attacks are one thing. This internet message board is a fantasy discussion. You can say as many nasty things about "Vic the ATPN poster" as you want, I scarcely care except to fire some flames back against "LegendKiller the ATPN poster." That's all in fun. However, you start talking lies about the professional ethics of my real life self, and you've gone too far.
Is this really that hard for you to figure out? And was it really so shocking to you when I fired back the same at you?
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