Where do you stand?

[BigPapaVol]

Idiots? Possibly. I have no idea how they had a clue what they were actually insuring. The way these MBS's were structured there was zero transparency. With the way they were built into tranches, split amongst multiple funds, and otherwise cut into pieces it had to be nearly impossible to assess the true risk and give a path for recourse. I'm not sure I would insure something like that -- but I guess they just took the ratings agencies word for it when they would drop AAA bond ratings on junk loan securities. It was a failure up and down the chain and the reason was absolute profit.

As for the buyers -- no one was watching the hen house. Wall Street basically was screaming for more collateralized debt and demanding the higher returns of subprime. Lenders fed the frenzy by disregarding the fundmental of lending -- borrowers ability to repay -- in turn receiving immediate and large profits of SRP's. Wall Street claiming ignorance is false though -- the fundamentals of higher return is a higher risk loan. There is no innocent party, but I believe the underwriting guidelines approach to Fannie/Freddie is a little off target. It was bad and they certainly stepped away from fundamentals -- but not even in the same ballpark as what banks and IB's were allowing. The idea that you could do 100% financing with ZERO documentation (only need a name, SSN, and credit score) is mind-boggling. Fannie/Freddie never did this -- this was a bank/shadow bank creation.

you clearly know the mortgage market better than I, but not the distribution end. Investment banks are distributors of the products, make markets in them and provide advisory services. The buyers are the ones accepting third party, and apparently shoddy due diligence. Bottom line is that to the extent that buyers believed rating agencies or took that Ambac could insure the higher ratings, the street generated the product and the pricing. Buyers bought in droves and the products became a giant trading world. When the demand dropped to 0 for them, or at least the subprime tranches, their value went to near 0, murdering capital for the holders.

Default rates don't justify the current pricing so people are essentially scared of underlying asset values, hence massively devaluing the bonds. I get it, but it's still irrational. The protection inherent in giant pools in giant markets is still in these things. Default rates are around 2.5% and those have to be concentrated in the subprime category. The entire MBS market shouldn't get killed here. The underlying asset value only matters to the extent that people quit paying and that's not going to happen across the board.
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[VolByBirth]

you clearly know the mortgage market better than I, but not the distribution end. Investment banks are distributors of the products, make markets in them and provide advisory services. The buyers are the ones accepting third party, and apparently shoddy due diligence. Bottom line is that to the extent that buyers believed rating agencies or took that Ambac could insure the higher ratings, the street generated the product and the pricing. Buyers bought in droves and the products became a giant trading world. When the demand dropped to 0 for them, or at least the subprime tranches, their value went to near 0, murdering capital for the holders.

Default rates don't justify the current pricing so people are essentially scared of underlying asset values, hence massively devaluing the bonds. I get it, but it's still irrational. The protection inherent in giant pools in giant markets is still in these things. Default rates are around 2.5% and those have to be concentrated in the subprime category. The entire MBS market shouldn't get killed here. The underlying asset value only matters to the extent that people quit paying and that's not going to happen across the board.
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I agree the distribution end isn't my bread and butter but I've had to be involved with the mortgage end quite a bit. The question then is who creates the CDS's? It's my understanding that the lack of transparency of these structures is part of the reason they have been crushed -- there is no ability to unravel these securities; payments of interest are required regardless of default; etc.

It also appears these complex debt strucutures are gone and we're moving towards covered bonds for more transparency.

In the end, I completely agree that these assets are undervalued. People tend to forget that there is collateral involved afterall.

 

[T-TownVol]

I agree the distribution end isn't my bread and butter but I've had to be involved with the mortgage end quite a bit. The question then is who creates the CDS's? It's my understanding that the lack of transparency of these structures is part of the reason they have been crushed -- there is no ability to unravel these securities; payments of interest are required regardless of default; etc.

It also appears these complex debt strucutures are gone and we're moving towards covered bonds for more transparency.

In the end, I completely agree that these assets are undervalued. People tend to forget that there is collateral involved afterall.

Doesn't that bring it back to the housing market where the collateral, that most people used, is not worth what it was?

 

[VolByBirth]

[/B]

Doesn't that bring it back to the housing market where the collateral, that most people used, is not worth what it was?

Yes. But the valuation of these assets are going for 10-20% of original value. The sheer collateral, even with the losses in housing value, is still valued higher than what these assets are selling for. My guess is it's the lack of transparency and inability to sort through the good and bad loans in these securities.

 

[BigPapaVol]

Yes. But the valuation of these assets are going for 10-20% of original value. The sheer collateral, even with the losses in housing value, is still valued higher than what these assets are selling for. My guess is it's the lack of transparency and inability to sort through the good and bad loans in these securities.

I disagree. People just don't think there is a price low enough today. There is no possible way that RE values have fallen that far. However, with no financing means available today, values don't matter because buyers can't buy. Those values will rebound enormously when lenders allow good buyers to leverage on RE, as they should be able to do.

Buyers today are pure equity types looking for enormous returns. Using them to generate pricing is simply worthless.

 

[joevol320]

Said it before and I'll say it again, if Palin makes it into office, this country is absolutely screwed.

how is that? she has more executive experience than hussein obama plus she isn't friends with terrorists or muslim extremists.

 

[VolByBirth]

I disagree. People just don't think there is a price low enough today. There is no possible way that RE values have fallen that far. However, with no financing means available today, values don't matter because buyers can't buy. Those values will rebound enormously when lenders allow good buyers to leverage on RE, as they should be able to do.

Buyers today are pure equity types looking for enormous returns. Using them to generate pricing is simply worthless.

Are you talking about financing for residential real estate? If so, I'd disagree with the availability of cash. If you're talking about something else you probably know better than me.

 

[BigPapaVol]

Are you talking about financing for residential real estate? If so, I'd disagree with the availability of cash. If you're talking about something else you probably know better than me.

residential RE to some degree, but commercial RE money isn't available and builders can't borrow so underlying land is worthless today. Until potential exit type buyers have liquidity, underlying RE values of all types are going to remain artificially low because comps are all going to be generated by cash buyers, who are essentially vulture capitalists.
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[VolByBirth]

residential RE to some degree, but commercial RE money isn't available and builders can't borrow so underlying land is worthless today. Until potential exit type buyers have liquidity, underlying RE values of all types are going to remain artificially low because comps are all going to be generated by cash buyers, who are essentially vulture capitalists.
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Commercial lending is awful -- so I agree there.

As for residential -- the credit crunch is way overblown. Fannie and Freddie are still running relatively smoothly and FHA is picking up a ton of slack in the low down payment department. In the true jumbo market there are some issues -- but with the temporary loan limits it's reduces the percentage of borrowers that require jumbo loans.

Financing can certainly account for pricing pressure on commercial, but I disagree on residential. There is a ridiculous inventory overhang. That excess supply will drive prices down through 2009 at least (I think we're around a 12 month supply). Expect about another 10% drop in residential....commercial will be a function of financing for sure.

 

[BigPapaVol]

Commercial lending is awful -- so I agree there.

As for residential -- the credit crunch is way overblown. Fannie and Freddie are still running relatively smoothly and FHA is picking up a ton of slack in the low down payment department. In the true jumbo market there are some issues -- but with the temporary loan limits it's reduces the percentage of borrowers that require jumbo loans.

Financing can certainly account for pricing pressure on commercial, but I disagree on residential. There is a ridiculous inventory overhang. That excess supply will drive prices down through 2009 at least (I think we're around a 12 month supply). Expect about another 10% drop in residential....commercial will be a function of financing for sure.

I live in a city with almost no excess supply and folks still aren't there and the ones that are can't qualify for loans. The number of non-qualifiers is astounding.

The artificially depressed buyer market drives the denominator down in the absorption time calc, so inventory sounds egregious, but it's massively overstated as well, at least where I am.
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[VolByBirth]

I live in a city with almost no excess supply and folks still aren't there and the ones that are can't qualify for loans. The number of non-qualifiers is astounding.

The artificially depressed buyer market drives the denominator down in the absorption time calc, so inventory sounds egregious, but it's massively overstated as well, at least where I am.
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Makes sense.

However, if you can't qualify for an FHA loan -- then you shouldn't be buying a house. For homes outside the FHA, GSE threshold -- issues do remain.