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Karen Garcia
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No Mortgage Lenders in Jail, but a Borrower Lands There
The government did send someone to prison for actions related to the subprime mess. But not who you’d expect.A clever prosecutor can usually get a conviction. -
G.E.’s Strategies Let It Avoid Taxes Altogether
General Electric is skilled at avoiding taxes, lately to the extent that the Treasury owes the company money."Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines."And it only took thirty years of constant effort.My time is more valuable.G.E. has never been a nice company. J.P. Morgan created it to exploit Edison's electrical patents. Edison left and did the phonograph and the motion picture.
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Elizabeth Warren, the Republicans’ Punching Bag
“Great article, with plenty of trenchant humor inserted within the story. Warren vs. Greedy Fools. Looking forward to Joe Nocera's op-eds.”The greedy fools would not let her ruin their game.She found another way. -
Governor Christie’s Talk Is Not Always Straight
A review of Gov. Chris Christie’s public statements shows that many of them do not hold up to scrutiny.He is not going to jail yet. He is working on it. -
MERS, the Mortgage Holder You Might Not Know
An obscure company claims to hold title to roughly half of the home mortgages in the nation — 60 million loans.They are well known.http://en.wikipedia.org/wiki/MERS
(http://www.google.com/cse?cx=partner-pub-7495486645615446%3A7uv35fyphe3&ie=ISO-8859-1&q=mers&sa=Search&siteurl=www.calculatedriskblog.com%2F2011%2F11%2Freport-payroll-tax-cut-extension-is.html%3Futm_source%3Dfeedburner%26utm_medium%3Dfeed%26utm_campaign%3DFeed%253A%2BCalculatedRisk%2B%2528Calculated%2BRisk%2529#gsc.tab=0&gsc.q=mers&gsc.page=1)twenty four results.
Friday, July 06, 2007
Delinquencies and Defaults for UberNerds
by Tanta on 7/06/2007 04:20:00 PM
I have no intention of exhausting the topics of delinquency and default today. My goal is rather more modest than that; I merely want to introduce to the non-mortgage-backed-security world a few definitions of terms, in hopes that perhaps some of these startling numbers being thrown around in the press can be interpreted. Besides that, it's too early in the day to start drinking, so we might as well waste our time being educated.
The fact is we see a lot of press reports quoting delinquency rates as if they were default rates. A large part of the problem, besides the general lack of expertise of a lot of business reporters, is that generally the only freely-available numbers to report are delinquency rates expressed as a percentage of a given book of business. There are other, more sophisticated ways of measuring credit loss risk than a simple bucketing of loans into categories of "current" and "delinquent," but these specialist calculations are generally not available to those who do not pay for subscriptions to analytic services. One of the most important calculations is the "roll rate," or the rate at which current or delinquent loans are "rolling" into the next bucket (current to 30 days, 30 days to 60 days, etc.). Another hugely important measure is the default rate: the projection of actual defaults for a given bucket of current or delinquent loans.
It is not possible, of course, to understand default rates without understanding the distinction between "delinquency" and "default." There are alternative ways of measuring delinquency (the "OTS method" and the "MBA method"), but it comes down to the same thing: a delinquent loan has missed at least one scheduled payment. Therefore, a "30-day" delinquent loan is past due by one payment as of the report date; a "60-day" is past due by two payments, and so on. The trouble is that these may or may not be consecutive or even most recent payments.
30-day delinquencies are very volatile. They are often seasonal, for one thing, and they can very often turn into what underwriters call a "rolling 30" ("rolling" in this case is not to be confused with a "roll rate" of 30 to 60 days delinquent). Imagine a borrower who is current through the June payment, misses the July payment, makes the August payment, and continues on through the end of the year making a payment each month, but never making up that missed payment from July. That borrower would be considered "current" in July (you aren't "delinquent" for our purposes until you're at least 30 days delinquent), 30 days deliquent in August, 30 days delinquent in September, and so on to the end of the year. It doesn't matter how far in time you get from that missed payment: you only missed one, so you are never on any given reporting date more than 30 days down.
You can have "rolling 60s," but servicers are rather less likely to put up with them than rolling 30s. At some point a servicer has to decide whether to "accelerate" the loan or not, and that's always a tough call with a rolling delinquency, since the very fact that it's "rolling" means that the borrower has resumed making payments; the borrower simply has not caught up with the misssed payment or payments. These borrowers are generally the best candidates for a modification. The lender can add the missed payment to the loan balance, which brings it "current" again and stops the accumulation of late fees and endless collection calls, among other things.
Things like these "rolling 30s" do make it unwise to use simple metrics like a 30-day delinquency rate (the percentage of loans by balance or units in a given pool or portfolio that are 30 days delinquent as of the report date) to predict future losses, since a simple delinquency rate calculation cannot distinguish between a "new 30" and a "rolling 30," and loans that are 30-days delinquent last month can certainly become current this month, as borrowers do sometimes make up missed payments. This is the main reason that most reports distinguish between "delinquency" and "serious delinquency," the latter generally defined as 60+ or 90+ lates.
As a general rule, most servicers do not begin foreclosure proceedings until a loan is 90 days delinquent. This isn't a "magic number," it's just a rule of thumb. For our purposes, one thing it means is that a servicer will usually report separately on loans "90 days delinquent" and "loans in foreclosure." "In foreclosure" means the loan is in a process, often a long one, that starts with the filing of a foreclosure notice and ends at an auction on the courthouse steps. Because there can be loans that are 90 days or more delinquent that are not in foreclosure--there could be forbearance or short sale or other workout arrangements in process, or a bankruptcy stay could be delaying the foreclosure filing--it is important to verify, with any set of numbers you look at, whether a "delinquent" bucket includes loans in foreclosure or not, to avoid double-counting when the numbers are totaled.
It makes a big difference, because the "roll rate" or likelihood of eventual default of a 90-day delinquent loan is not the same as the "roll rate" of a loan in foreclosure. Two such loans might actually be past-due for the same amount of time, but the fact that the servicer initiated foreclosure proceedings in one case but not the other is, precisely, a judgment of relative likelihood of default. Plenty of people have plenty of suspicions about how wise some of these servicer judgments are--that's the whole uproar over modifications and forbearance in a nutshell--but the point is that once a servicer files a foreclosure notice and begins the process, ultimate default of the loan is more likely just because the process is in motion.
This is probably the point where we should define "default." That term has an everyday legal definition that may confuse people in the context of credit losses on mortgage securities. In everyday terms any violation of a contract, including a mortgage, is a "default." You can, technically, be "in default" of your mortgage by failing to pay a $17.50 HOA assessment or moving out of your home, even if you keep your mortgage payments current. For purposes of calculating loss probability on a pool of mortgage loans, "default" means something much more specific: a defaulted loan, according to the Bond Market Association, "no longer pays principal and interest and then remains delinquent until liquidated." There are many ways a loan can liquidate: it can be foreclosed and the property purchased by a third party; it can become REO and the REO liquidated by sale to a third party; it can be a short sale or short payoff (the latter being a refinance of a delinquent loan in which the noteholder accepts less than full payoff).
You have to remember that "default" does not mean "loss." Imagine a $100,000 loan which becomes delinquent, is foreclosed, becomes REO, and is ultimately liquidated by sale of the REO. This loan is defaulted, but the loss to the noteholder might be only $20,000 after application of sale proceeds. That would mean that $80,000 comes back to the noteholder in the form of principal repayment. The importance of measuring defaults accurately is that it allows the security accounting to distinguish between normal or voluntary prepayments (principal returned via a performing loan's refinance or sale of the subject property) and involuntary prepayments via recovery from liquidation of delinquent loans. But the purpose of reporting default balances is not to equate defaults with net losses. The latter will depend on "loss severity," or what percentage of the outstanding loan balance is not recovered in liquidation. That, obviously, is an issue of home prices and servicer efficiency.
The problem, then, is getting from delinquencies to defaults, in terms of projecting what ultimate losses will be. Here's an example, from Fitch, of how one might project losses on a seasoned mortgage pool:
The first column puts the loan pool in "buckets" according to delinquency status as of 18 months age of the pool. The second column projects lifetime defaults for each bucket, using a series of assumptions and calculations based on historical experience, performance of this specific pool in its first 18 months compared to initial projections, homeprice appreciation estimates, and so on. The projected defaults range from 11% for "current" loans to 76% for "foreclosure" loans (the REO category is 100%, since once foreclosure is completed there is no possiblity of a loan becoming current again, and the definition of default is the liquidation of a delinquent loan).
The third column is important, because while "current" loans have the lowest likelihood of default (11%), they are the largest bucket in the pool, and so "current" loans that ultimately default are projected to be 9.1% of the pool, as opposed to "foreclosure" loans with the highest likelihood of default (76%), which are projected to be 2.9% of the pool.
The fourth column is the loss severity, or the percentage of the loan balance that is not expected to be recovered after liquidation. For the purposes of a table like this, remember that it is an average: some loans may have much higher recoveries, and some much lower. Obviously it is a crucial calculation for determining ultimate losses.
The final column gives you expected loss as a percent of the current pool balance, which in this example is 63% of the original balance. (The original balance has been reduced by 37% prepayments.) The projected loss as a percentage of original pool balance is 5.25%, or 7.1% of current pool balance.
Note that the pool has already experienced losses of 0.77% in its first 18 months. That does not necessarily mean that the lowest-rated tranche has taken a write-down; in fact, overcollateralization and excess spread on most deals should be more than sufficient to cover losses of 0.77% in 18 months without "breaking into" the principal balance of the lowest-rated tranche. The significance of the projections you see on this chart are, for an actual bond, a question of how the timing of projected losses play out as well as the adequacy of the OC and excess spread. It is possible that this pool will never see actual principal write-downs, even if it achieves losses as projected in the chart, if its OC and excess are adequate. (They may well not be adequate, but this chart doesn't tell you that one way or the other.)
It should be clear, but let me be tedious: the projections of loss in the example here are over the remaining life of the pool, not over the next year or month or week. Such projections may or may not be accurate: projections are projections, not divinations. I bring this example up not to suggest that it produces a loss prediction we can use as a rule of thumb: this is a specific example pool and your mileage may vary on a different pool. My purpose is to give us some perspective on the conclusions some people like to draw from looking at delinquency statistics. Delinquency reports are just a snapshot in time; they are not, themselves, predictions. So the weenies who have been going around trumpeting the fact that, say, 83% of subprime loans are currently current, as if that meant that the 83% will never become delinquent or defaulted in the future, are, well, weenies.
As are some of these opposite-side weenies who seem to think that a 17% delinquency rate means 17% losses to a pool. That would be true only if the "roll rate" of all delinquencies-to-default is 100% and all foreclosed homes have asales price of $1.00. Not likely, to say the least. Even if the calculations in this example pool are off by a great deal--if the true total defaults end up 30% instead of 20% and the severity is 50% instead of 35%--you get a cumulative loss of 15% of current balance. You can, if you're like me, be convinced that there are some really, really cruddy pools out there that will have numbers at 18 months that look a lot worse than this example from Fitch. I do not doubt that there will also be at least a few that do better. Fitch's assumptions about home price appreciation may be off a little or off the wall: that's one reason we keep watching these trends so closely here at Calculated Risk.
It is particularly annoying when we see people throwing around delinquency numbers as if they were loss percentages, and then applying that number to the total outstanding balance of all subprime securitizations to come up with some scary-looking number in the billions, without taking into account, among other things, the original expected loss on the pools. Not even the meanest (sane) critic of the rating agencies accuses them of having predicted no losses at all when these deals were originally rated. If that were so, there'd be no OC or excess spread and all bonds would be AAA. I think a few folks are getting worked up over the failure of the rating agencies to downgrade some of these pools that have what look like high delinquency rates, without questioning the extent to which those rates are or are not in excess of the original projections. Looking at the example pool above, for instance, you see a projected loss after 18 months, but what you don't see is what the original projection was. Without that, there's no way to conclude that this pool deserves a downgrade.
You might want to plow all the way through the document from which this example is taken if you want to know more about how a delinquency analysis is part of a potential downgrade of a security. It's called "U.S. Subprime RMBS/HEL Upgrade/Downgrade Criteria," and it is available here to registered users of Fitch's website.
Friday, September 12, 2008
Mortgage Pig™ Fights Back
by Tanta on 9/12/2008 10:25:00 AM
I have been fighting the impulse to break my "no political posts" rule for days now, even though Mortgage Pig™ and I have been taking this all very personally. But Krugman finally pushed me over the edge.
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Executives Behind Financial Crisis at Little Risk of Jail Time
You’re entitled to wonder whether any executives who helped kindle the financial crisis will see jail time.The executives bought the very most skilled legal advice going in. -
Brutal Crackdown in Moderate Bahrain
“So much for "moderate" Bahrain, good friend of the USA. Still waiting with baited breath for condemnation by Prez O.”It would be so much easier if our hands were clean.There is nothing moderate about autocracy. -
pvolkov
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Making Things in America
We can't afford it. Maybe soon.
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What Egyptian Repression Looks Like
In my column today, I talk about two videos that demonstrate the brutality exhibited by elements of the Egyptian regime. Both have been on TV, but if you haven’t seen them take a look. They’re stomach-churning, and I think that after seeing them y...
According to Bismark one should not watch politics or sausage in production. This is a kind of politics.This was only the beginning.
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Does IMF Stand for Impressive Macroeconomic Flexibility?
So the IMF is holding a meeting on rethinking macroeconomic policy (I was invited but couldn’t make the timing work.) And the Fund’s chief economist has already made it clear that he’s open to some serious revision of the prevailing paradigm.
http://www.calculatedriskblog.com/2011/11/wolfgang-munchau-only-days-to-avoid.htmlSunday, November 27, 2011
Wolfgang Münchau: "Only days to avoid collapse" of eurozone, Currency Market prepares for breakup
by CalculatedRisk on 11/27/2011 08:12:00 PM
From Wolfgang Münchau at the Financial Times: The eurozone really has only days to avoid collapse
First, the European Central Bank must agree a backstop of some kind ... The second measure is a firm timetable for a eurozone bond. ... The third decision is a fiscal union. ...
See Brad DeLong's post for more excerpts.
If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse.
From the WSJ: Europe's Leaders Pursue New PactThe proposal ... would make budget discipline legally binding and enforceable by European authorities. ... A majority of euro-zone governments hope that the pact would be an unstated quid pro quo for massive intervention in bond markets by the ECB. Many policy makers, investors and economists believe that only decisive ECB action can stop the unraveling of euro-zone debt markets ...
From the WSJ: Inner Workings of Market Readied for Euro BreakupCompanies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies. ... Banks, analysts and investors are preparing for what many of them say is an increasing likelihood of a euro-zone breakup, either completely or in parts, leading to the potential return of currencies such as the drachma, German mark or Italian lira.
Interesting times.
http://delong.typepad.com/sdj/2011/11/ten-days-to-save-the-eurozone.html
Ten Days to Save the Eurozone?
Or so Wolfgang Münchau says:
The eurozone really has only days to avoid collapse: In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action. Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens. This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.
Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind…. The second measure is a firm timetable for a eurozone bond…. The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy….
I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression….
I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints….
I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours. Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.
Bank of France's Noyer Speaks, Says Europe Is In A "True Financial Crisis"
Submitted by Tyler Durden on 11/27/2011 - 19:36 European Central Bank France In case anyone was wondering why the EURUSD is back to levels from several hours ago and well off the ramp highs (with ES continuing to pretend nothing matters), it is due to Bank of France Governor Christian Noyer who speak the following bullet points at a forum in Tokyo:
- Crisis Has Worsened Significantly
- Market stress has intensified and Europe is in a “true financial crisis,”
- Markets and some governments think the ECB should buy more govt debt
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