mortgages

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 »

I’m full of warm feelings today so let’s say nice things about the government and government-ish people who are trying to help the housing market. First, the national mortgage settlement people, who are a diffuse group of 49 state attorneys-general1 plus some federal regulatory people. A while back they got mad at some banks that serviced mortgages, because the “service” those banks provided included a whole lot of foreclosing on houses with shoddy paperwork and a certain amount of foreclosing on the wrong houses, etc. So they ended up signing a settlement with some of those banks in which the banks promised to (1) do somewhat less of that and (2) fling billions of dollars at homeowners in various forms of mortgage relief more or less unrelated to the shoddy foreclosure practices.

This was a good idea! The shoddy foreclosure practices were bad, but they were not like a massive macroeconomic problem. They were mostly a paperwork problem. If you fixed the paperwork problem then you’d still have the other problem, the one where millions of people are unable to pay their high-interest-rate underwater mortgages. Flinging billions of dollars at those people addresses that problem, which strikes many people as more important than the paperwork.

So the other day Bank of America, one of the banks that signed the settlement, announced that it is making good progress at flinging out that money, which is nice! Except there is an amusing / amusingly evil footnote to that, which is: they are mostly flinging out other people’s money. This is less nice! Here is the FT: Read more »

As you may have heard, because you’ve read the reports reports or picked up on the Morse code message he’s blinked out during every appearance on CNBC or he threw himself on the hood of your car and screamed “Get me outta here” the last time you drove up to the Treasury building, Tim Geithner is ready to say good-bye to Washington. Has been for some time, in fact, but previous requests to go home were all denied. Now that his bosses are supposedly going to allow him to leave in the event Obama is reelected, many are wondering what will be next for TG. Despite having spent the majority of his career in public service and giving the impression that he has no desire to work for Wall Street, Bloomberg is thinking that with the albatross that is his unsellable Larchmont house around his neck, a family, and college tuition to pay, Geithner may not have a choice. Read more »

ProPublica has a new story about Freddie Mac and it’s good, go read it if you like getting angry about mortgages. The gist is that Freddie were big jerks about not letting people refinance their mortgages, which everyone kind of knew already; what this reveals is that:

  • They were jerks mostly to increase their own profits, which I submit to you everyone also knew. Actually I submit to you that’s pretty much a tautology. But also
  • They were also jerks a little bit to screw with Obama, which is news:

[Board member Robert] Glauber, director Linda Bammann and head of risk management Paige Wisdom resisted mass refis. One executive viewed their objections as colored by partisan unwillingness to help the economy recover, something that would benefit President Obama.

Everyone denies everything etc. etc.

You can have both efficiency and allocation questions about refinancing mortgages. Allocation is just “there is a pot of money; it can go to mortgage owners in the form of keeping interest rates on existing mortgages the same, or to homeowners in the form of lowering those interest payments”; this is a boring question of interest-group power but one that is weird for Freddie Mac’s conservator to answer? But I guess who else would? Anyway “these officials feared that mass refinancing would hurt the company’s bottom line and therefore its ability to repay taxpayers” so I guess they picked mortgage owners – i.e. taxpayers who owned Freddie who owned mortgages, which is a somewhat attenuated path to “taxpayers”1 – over homeowners.

Efficiency is “lowering the interest rates on existing mortgages [ will | will not ] lower default rates, revive the economy, and make the pot of money bigger for everyone”; this is an interesting economics question and the evidence suggests that the answer is, yes, HARP-y refinancing programs probably do reduce defaults. You could have a good-faith empirical disagreement with that, though your good faith might be called into question if you thought that refi programs were “designed to be a stimulus” but then assumed no stimulative effect.

My favorite weird point is this: Read more »

  • 24 Oct 2012 at 2:28 PM
  • Banks

Bank Of America’s Countrywide Acquisition Gets 2.5% Worse

Bank of America bought Countrywide Financial in 2008 and it’s fair to say that went poorly; the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now. If you were trying to figure out the maximum past and future losses you might start with the fact that Countrywide Financial originated about $2.2 trillion of mortgages between 2003 and 2007; ignoring anything before that you might ballpark the upper bound at $2.2 trillion. Let me draw you a Venn diagram, because this is now that kind of blog:

Eventually that yellow circle can grow to the size of the blue circle, but no bigger: the absolute highest number of fraudulent mortgages that Countrywide could have written is “all of the mortgages it wrote.” Right? No, wrong, of course: Read more »

  • 05 Oct 2012 at 1:59 PM

Dogs Getting More Attractive Financing Than Houses

I guess if you read the jobs numbers today you’d say “huh, the economy is getting a little better,” though there are other avenues you could go down. But if you read that Petco Animal Supplies, where the pets go for their animal supplies,1 sold $550 million of Caa1/CCC+ holding-company covenant-lite PIK-toggle notes at an 8.62% yield2 yesterday to fund a dividend recap, you’d be all “HOLY CRAP I LOVE 2006!”

The Journal article on the latter point takes the view of “some managers are sort of skeptical of holdco PIK-toggle notes to pay dividends to the private-equity owners of pet supply stores,” and, I mean, you can’t blame them (the managers or the Journal), but of course the real story is not “some people didn’t buy some terrible bonds,” which is always and everywhere true, but rather “other people did,” which is less common.

Part of the purpose of the Fed bidding everything government-guaranteed and <=5 years down to a zero yield is to convince / force the investors of the world to start making reckless investment decisions, er, “move further out the risk curve,” because people making reckless investment decisions like “I want to fund a chain of big-box kibble stores” is how we create new productive ventures and Put Our Economy Back To Work™. That and juicing aggregate demand by handing people money, which in America takes the somewhat unintuitive form of (1) lending them money to buy houses and/or (2) convincing them that they have more money because their house price went up.

The Petco part of the strategy is working like a charm. First of all, buying these bonds is just a classically reckless investment decision. Really the recklessness decision checklist for fixed-income investments consists pretty much of: Read more »