It’s becoming easier to get a mortgage if you’re the sort of person who should be getting a mortgage. But it seems it will take banks longer than five years to forget an economic crisis caused/fueled/exacerbated by universal mortgage eligibility. Read more »
mortgages
Banks Not Especially Eager To Start Handing Out Mortgages To People With Credit Scores In The Low 400s Yet
By Jon Shazar
Ninety percent of what happens in the typical lawsuit is (1) a lawyer for one side sends a letter to the other side asking for some information to prepare for a trial that will never happen, (2) the lawyer for the other side sends back a passive-aggressive letter refusing to provide that information, and (3) the lawyer for the first side sends a passive-aggressive letter to the judge saying “NO FAIR.” Seriously, that’s what happens. It’s called “discovery,” and it goes on until the lawyers’ bills have gotten big enough that everyone decides to settle the case.
In that milieu, someone sending an aggressive-by-passive-aggressive letter qualifies as huge news, and so there is a lot of excitement over this rather tart mandamus motion that fifteen big banks filed to overturn some discovery rulings that Judge Denise Cote made in a mortgage-backed-securities lawsuit. I will not attempt to convince you that its tartness is all that interesting; I just want you to have context for why some people think it is.
The case is interesting though. The FHFA, the regulator that oversees Fannie and Freddie, is suing the fifteen banks1 for selling crappy subprime residential mortgage-backed securities to Fannie and Freddie. Being a securities-fraud lawsuit, the basic claim is “you lied to us in the offering documents for these RMBS, and we relied on those lies, so we bought your RMBS, and then we lost money because of your lies.” And the lies in the offering documents are not “these mortgages will never default!,” but rather lies to the effect of “we bought these loans from originators, and reviewed those originators’ underwriting practices, and we believe that the originators underwrote them carefully and didn’t just stuff them full of fraud.”
The banks make a pretty good point, though, in this motion: Fannie and Freddie, who were being deceived by the big underwriter banks into buying all these RMBSes stuffed with crappy mortgages from crappy originators, were also separately buying similar mortgages directly from the same originators. And, presumably, doing whatever due diligence they expected the underwriter banks to be doing: Read more »
Bloomberg has a delightful story today about a new JPMorgan RMBS transaction, its first non-agency deal since the crisis. Specifically about this:
The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices.
The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in the presale report.
So naturally the deal is limited to an Aa rating, as it would be at Moody’s based on those sort of rep and warranty weaknesses, right? Errr not so much:
The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.
So 92.6% of the deal will be AAA rated at Fitch and Kroll, the other rating agency on the deal. Here’s the cap structure from Kroll’s report: Read more »
Lloyd Blankfein is getting no help from on high with regard to a mortgage-backed securities class-action lawsuit. Read more »
Mortgage Borrowers Suing Libor Banks For Making Their Rates Too Low Because Hey, Why Not?
By Matt Levine
You may not share my tastes in this sort of thing but I’m going to go ahead and give American Banker a gold star for the headline “Libor-Rigging Set Interest Rates Too Low, Too High and So Low They Were Too High.” The reference is to this Journal article about the mishegas of Libor lawsuits. Since every bank seems to have manipulated Libor, and in different directions at different times, you get to sort of take your pick about what you want to sue over. And so some borrowers are suing banks for setting Libor too low, some municipal swaps counterparties etc. are suing banks for setting Libor too high, and one cable-car driver is taking the second derivative:
Carl Payne, a 72-year-old former cable-car driver in San Francisco, alleged in a federal-court suit filed in December that manipulating interest rates lower inflated margins on adjustable-rate mortgages tied to U.S. dollar Libor. The law firm acting on Mr. Payne’s proposed class action suit, Baron & Budd P.C., estimates that about a million mortgages were affected.
The interest rate on the mortgage for his condominium is based on the one-year rate plus a 2.25-percentage-point margin that is fixed over the life of the 30-year loan. Because the rate when he took out the mortgage was artificially low, Mr. Payne says, he was locked into a higher margin than he should have been.
This is obviously my favorite! I’ve been making this argument since July and I sort of assumed I was kidding, but no, Mr. Payne is right there with me: Read more »
A primary goal of financial engineering is to confuse the bejeezus out of Them while remaining crystal clear to Us. There’s no point to it if it doesn’t in some way confound the expectations of some Other, whether that Other is the tax authorities, bank capital regulators, rating agencies, customers, or markets generally.1 But the worst possible outcome is for a product to be unpredictable to whoever built it, mostly because, if it was any good, they built a lot of it, and if it blows up on them it’ll hurt.
There is an obvious tension here: complicated products serve well to confuse Them but are more likely to end up acting up on Us as well.2 One fruitful approach is for Us to be just a bit smarter than Them. Another approach, lovely when it works, is to build a product that is so beautifully simple that anyone can understand it, but that has one simple conceptual twist that falls right in the particular blind spot of one particular targeted Them.3
You can bracket the question of whom residential mortgage backed securitizations were designed to confound,4 and just take a moment to realize: they kind of screwed the banks that did them, no? I mean, “compared to what” I guess – imagine if Countrywide had done all the lending it actually did, but kept everything on its balance sheet – but the fact that BofA has eighty zillion dollars in putback liability must be discouraging for whoever’s left there on the securitization desk. Like: the whole idea was to put some loans in a box and sell the box to investors; the investors, not you, now own the credit risk on the loans. You own nothing. The loans have nothing to do with you. Sure you signed a piece of paper saying some stuff about the loans, just before you waved goodbye to them, but why would you have read that? Those are just reps and warranties; those are for the junior law firm associates to haggle over. You sold the loans, it’s done, right? Read more »
AIG Pretended It Might Sue The Government To Distract Attention From Its Actually Suing The Government
By Matt Levine
There’s a lot to choose from but I’m going to say that the very best thing about AIG’s pretending it might sue the government last week, and then not doing it, is that then it actually sued the government:
American International Group Inc. filed a lawsuit against a Federal Reserve vehicle created during AIG’s bailout that held some of its troubled mortgage bonds, in a dispute over rights to sue over the bonds. … At issue is whether AIG, in selling billions of dollars in troubled mortgage bonds to the New York Fed in late 2008, transferred its rights to sue for losses it incurred on the securities.
So it’s not quite as big as the Hank Greenberg give-me-back-my-$25-billion lawsuit that AIG opted out of, but it’s pretty big; AIG thinks it has over $7 billion in damages against Bank of America/Countrywide alone. If it’s right, either AIG or the Fed should be entitled to about $7bn of BofA’s cash. So call this 1/4 as big as joining the Greenberg suit, though considerably less than 1/4 as offensive.
One way to resolve this dispute amicably might be to conclude that both AIG and the Fed should be entitled to $7bn of BofA’s cash. After all, who decided that only one investor gets to sue BofA per mortgage? We’ve talked before about the fact that BofA’s liability for Countrywide mortgages does not seem to be limited by the amount of mortgages that Countrywide wrote; several lawsuits now cover overlapping pools of mortgages. How much BofA ends up paying for those mortgages will depend on political and PR factors, on the existence of embarrassing emails, on technicalities of contract drafting and legal doctrines, and on how much money BofA, y’know, has, but it seems unlikely that it will depend on some sort of one-mortgage-one-lawsuit principle. You write enough bad mortgages and you give up your expectations of tidiness. Read more »
Who won the Bank of America / Fannie feud? I want the answer to be “all of us,” but I guess it isn’t. Unlike Bank of America’s multi-front battle of deviousness with MBIA, which has spawned some genuine entertainment, BofA’s battle with Fannie has been conducted almost entirely in the boring trenches of actually flinging mortgages at each other. The story so far: back in the bad old days of “January 1, 2000 to December 31, 2008,” BofA/Countrywide sold approximately $1.4 trillion of mortgages to Fannie; in recent years Fannie has been figuring out that lots of those mortgages were badly underwritten, came with false reps and warranties, etc., and so it can demand that BofA repurchase them at par. It’s tried to do so on around $11bn of loans, and BofA’s reaction has been along the lines of (1) no and (2) “we’re so mad we’re going to stop selling you more mortgages,” which somewhat surprisingly to the casual observer actually seems to have been interpreted by both sides as a threat rather than a reward.
But today Fannie and BofA announced a settlement that would resolve all of those claims, as well as almost all future claims on the $297 billion of unpaid principal that remains on those $1.4 trillion of ’00-to-’08 mortgages.
The math here is a little funny. Let’s try to parse it: Read more »
There are some financial jobs that come with a perhaps undeserved swashbuckling cachet. “Oh, you know, I do hostile takeovers,” you say, and a certain crowd will treat you like you just got back from plundering a Spanish ship-of-the-line, even though you mostly sit in a cubicle updating spreadsheets and changing the wording in press releases. Then there are other jobs. When you say “I do liability management for insurance-company bonds,” everyone instantly thinks of spreadsheets.
Still, you swashbuckle on unrecognized, taking a quiet satisfaction in your piratical ways. Everyone in this story is a pirate, and this is a bond that somebody made or lost or made and lost a lot of loot on:
Read the Bloomberg article, and/or our last discussion of this situation a month ago, for more information. The quick back story: Read more »
There are lots of things to worry about in the world and somewhere on the list is the fact that, while yields on agency mortgage-backed securities are really really really low, the rate you’ll pay for a new mortgage is only really low, so a couple of reallys have fallen off a truck somewhere. This worry isn’t at the top of my personal list – my mortgage rate is low enough I guess? – but it seems to make many other people’s list for two intersecting reasons. First, if the primary desire of Fed policy is to get people to buy houses, be rich, etc., and if its primary mechanism for doing so is buying MBS, then the inefficiency in transforming that mechanism into that desire is rather macroeconomically important and bad. Second, if money is coming out of the Fed and not ending up in homeowners’ pockets, that leaves only so many pockets it could be ending up in, and it is easy enough to observe that big banks (1) sit between the Fed and the homeowners and (2) have lots of pockets. So you can see how it might be fun to worry about money going to big multipocketed banks, because if it does, you get to be mad at them.
Anyway the New York Fed is doing a conference on it today; here’s the background paper and it’s really interesting; I recommend it, particularly if, like me, you have a hazy understanding of agency mortgage securitization. Everything in this space is predicated on somewhat fake math but their math is less fake than the simple spread math, which basically assumes that banks make a profit of:1
- Annual Profit = Mortgage Rate – MBS Yield
By that math, as William Dudley points out, the spread was 30-50bps in the ’90s and early 2000s, but rose to 150bps in September and is around 120bps now. The Fed’s paper, on the other hand, walks through the actual securitization process to get cash flows into and out of the mortgage lender, and computes its profit (technically, profit plus non-interest-y costs like underwriting and hedging) as roughly:
- Up-Front Profit = Sale Price Into MBS – Origination Price + 4 x (Mortgage Rate – MBS Coupon – GSE Guarantee Fee
Why 4? I dunno it’s in the paper.2 Anyway by this measure here is what has happened in the world: Read more »
The SEC settled cases today with JPMorgan and Credit Suisse over “misleading investors in offerings of residential mortgage-backed securities” for a total of about $400 million, which the SEC plans to hand out to those misled investors. There’s been a lot of this sort of thing recently, so here’s a quick cheat sheet on who is suing whom over what mortgages:
- Everyone is suing every bank over all of their mortgages.
So fine but is that not weird? Two things to notice about big banks is that they are (1) big and (2) banks, both attributes that tend to accrue lawyers. And a thing that lawyers are supposed to do is stop stupid cowboy bankers from doing stupid illegal things. If you told me that one or two banks decided to go without lawyers for cost-cutting and/or risk-increasing reasons, I would be skeptical but perhaps willing to play along, but all of them? I am certain that JPMorgan has lawyers.1
The mystery is resolved and/or deepened if you look at most of what is being settled in these cases, which in highly schematic outline was:
- banks wanted to hose investors,
- they asked their lawyers if that was okay,
- the lawyers checked the documents and said “yes,”
- so they did.
In ever so slightly less schematic outline: Read more »
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NH BLG_DEALBREAKER <GO>
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