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Archive for the ‘mortgages’ Category

Housing prices and securitization, and their collapses, are the central causes of the Great Recession, and the debate now rages over their deeper causes and, related and more forward-looking, how to reform the regulation of financial markets to avoid future meltdowns without killing the goose that lays the Goldman Eggs.  The latest news is the extent to which plain old securities fraud seems to have played a role. The headlines have recently been grabbed by the SEC’s indictment of Goldman Sachs and their role in selling Abacus 2007-AC1 (e.g. here). This deal was for one billion dollars. This is a lot of money, but far short of the amount of the financial crisis. Remember, the total losses on sub-prime and alt-A mortgages in early 2008 given pretty bad scenarios were around 500 billion, an amount much smaller than that lost in the stock market decline following the internet boom in the 1990’s. The problem was the location of the debt instruments – hidden in banks and being held by all sorts of institutions that should have been holding only very safe assets. That and the cast that synthetic CDO’s seem to have been created with adverse selection in mind – picked to consist of the worse MBS and then sold as if they were the average MBS (see Pro Publica on the Magnetar CDO’s here). Some buyers did not check whether or not the dice were loaded.

But the important fact to keep in mind as the legal saga unfolds is that, so far, while one should always and everywhere prosecute securities fraud, this is chump change relative to the real causes of the financial crisis and should not be the primary focus of the new financial architecture. Although there is an important caveat. There may be many more instances of fraudulent sales of MBS. If this is the case, do we need to try to protect large financial institutions that manage other people’s money?  Are they really so unsophisticated as to get up and dance just because everyone else is? I hope not.

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April showers bring May flowers, and maybe April preliminary reports will finally bring some developments on the financial reforms.  The first look at the thinking of the Financial Crisis Inquiry Commission is now available on the FCIC website. The five reports (available here) cover the roles of securitization, the Fed, the Community Reinvestment Act, the mortgage crisis, and the GSE’s in the financial crisis. Your chance to weigh in on these reports is now – the Commission is inviting comment until May 15.

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To understand more about a  deadly bacteria, a researcher would try to isolate it in the lab, study it, dissect it, sequence its genome, etc.  The folks at NPR who have been covering the financial crisis wanted to learn more about toxic assets, so they took a similar tack. They bought one and have been studying it, dissecting it, and sequencing its genome. Their ongoing work nicely illustrates what a canonical toxic asset is. (They went very toxic, paying $1,000 for a mortgage-backed security of Countrywide mortgages!)

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The Federal Reserve Bank of New York has a fascinating and user-friendly way of presenting their data on mortgage financing, delinquencies, foreclosures and so forth across the nation for different types of mortgages. They have put together a point-and-click map of the US so you can see where the mortgage credit problems are hitting the hardest, with detail as fine as the county.  Note that the places where the foreclosures and defaults are the largest are those places with high increases in house prices. The other main contributing factor is of course the economy and job losses. The Associated Press has a complementary figure that plots some mortgage outcomes data with unemployment data. Again, there is a large correlation between high unemployment in a county and high delinquency and foreclosure rates.

Mortgage delinquency map

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Dear Citigroup,

In these turbulent times who doesn’t need additional capital to get through these cold winter months? Because of your strong record of providing banking services to me, I would like to offer you a special opportunity to raise capital and gain liquidity in one easy step. This offer is available only to you, and it is only available for a short time.

As you know, you are the proud owner of my mortgage. As a result you receive several thousand dollars a month from me. I am sure this helps your income statement! I am a great credit risk and this mortgage should be providing you with a great return. Sadly, I am guessing that you, like many banks in these hard times, have actually lost a lot of money on my mortgage. (Phooey on those mark-to-market rules.) We both know the troubling fact is that market values of mortgages have declined precipitously, and as you well know, my mortgage is a nonconforming mortgage. Even some AAA mortgage backed securities are trading at steep discounts, something like 50 cents on the dollar. This puts the market value of my mortgage at around half the outstanding balance.

But I am willing to buy my mortgage from you at above its market price! I am offering to buy that asset that is stuck on your books at about 50 cents on the dollar for 60 cents on the dollar. That’s right, you can sell an illiquid asset, gain hundreds of thousands of dollars in liquidity, and lower your risk of bankruptcy with one easy transaction.

In the future, you will of course not get my loan payments, but once you have sufficient capital, you can turn around and make a very similar mortgage loan at any point – rates are even currently very similar to my current rate.

So don’t sit around waiting for a government bailout! Make you and your stockholders happy. Call me now to take advantage of this exciting offer.

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