reality-based educator

RBE,

I apologize for going off topic but I would like an answer to a question that no-slappz, inter alia, if he is still around, may be able to answer.

This morning I heard that 2 more banks, including HSBC, were going to write down 4 or so billion dollars of securities consisting of subprime loans.

It suddenly ocurred to me that billions, I mean at least 40, have been written down, but the actual amount of the subprime loans must be considerably lower, I would think by a factor of 10, perhaps more. I mean that would mean 400 million in subprime loans.
How did the value of these loans get rated so high?

Thanks in advance.
 

RBE,

I apologize for going off topic but I would like an answer to a question that no-slappz, inter alia, if he is still around, may be able to answer.

This morning I heard that 2more banks, including HSBC, were going to write down 4 or so billion dollars of securities consisting of subprime loans.

It suddenly ocurred to me that billions, I mean at least 40, have been written down, but the actual amount of the subprime loans must be considerably lower, I would think by a factor of 10, perhaps more. I mean that would mean 400 million in subprime loans.
How did the value of these loans get rated so high?

Thanks in advance.
 

RBE,

I apologize for going off topic but I would like an answer to a question that no-slappz, inter alia, if he is still around, may be able to answer.

This morning I heard that 2more banks, including HSBC, were going to write down 4 or so billion dollars of securities consisting of subprime loans.

It suddenly ocurred to me that billions, I mean at least 40, have been written down, but the actual amount of the subprime loans must be considerably lower, I would think by a factor of 10, perhaps more. I mean that would mean 400 million in subprime loans.
How did the value of these loans get rated so high?

Thanks in advance.
 

Judith Regan is a gas-bag nutjob who has provided a lot of entertainment in recent years.

However, her divorce antics frequently appeared in the news. She is hell on wheels. But I do appreciate that she has published some successful books.

She knows how to grab a headline, but it's hilarious to think that she has a secret that would sink Giuliani's presidential run.
 

loop garoo kid, you asked about subprime loans. Some useful information follows:

Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying.

Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high interest rates, bad credit history, and murky financial situations often associated with subprime applicants.

Subprime borrowers usually have credit ratings below 620.

A subprime loan is one that is offered at an interest rate higher than A-paper loans due to the increased risk. Subprime, therefore, is not the same as "Alt-A", because Alt-A loans qualify for the "A-rating" by Moody's or other rating firms, albeit for an "alternative" means.

The value of U.S. subprime mortgages was estimated at $1.3 TRILLION as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding.

Approximately 16% of subprime loans with adjustable rate mortgages (ARM) are 90-days into default or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005.

A total of nearly 447,000 U.S. homes were targeted by some sort of foreclosure activity from July to September 2007, including those with prime, alt-A and subprime loans. This is nearly double the 223,000 properties in the year-ago period and 34% higher than the 333,000 in the prior quarter.

The estimated value of subprime adjustable-rate mortages (ARM) resetting at higher interest rates is U.S. $400 billion for 2007 and $500 billion for 2008. Reset activity is expected to increase to a monthly peak in March 2008 of nearly $100 billion, before declining. An average of 450,000 subprime ARM are scheduled to undergo their first rate increase each quarter in 2008.

loop, as I think you can see, your estimate of the size of the subprime market was way way way too low.

The total value of all US mortgages is around $10 TRILLION.
 

Loop,

If a loan is for $100,000, and there are 1 million loans, that is $100 billion dollars.

I think the average loan is more like $170,000 and many are considerably more. In the U.S. at the peak, between new and old houses, the annual sales rate was something like 3 million and most had mortgages. A mortgage is usually 30 years.

Lets say there were 50 million mortgages at $100,000 each, just to be conservative. Now we are talking, what $5 trillion?

Does that answer your question?
 

gentlemen,

Yes. Thank you. no_slappz was correct in that I way underestimated the aggregate amount of subprime loans.

Interestingly, my office building and suite was infested w/ mortgage brokers for much of the past several years. They seem to have gone as quickly as they came. My legal assitant obtained a subprime loan which got her into trouble but which she has refinanced successfully.

Certainly there is enough blame to go around. 1) People should not borrow $ they cannot rpay; 2) Brokers should not lend $ to poor credit risks; 3) lenders should not bundle such loans as securities; services should not rate them as good investments; and financial institutions should not have invested in securities backed by such loans.

I know you two recognize that the flaw in the system that allowed this problem to flourish ab initio is the prevalence of nationwide lenders who initiaite such loans and then sell them.

In the old days, one went to one's local banker who knew the property and knew you. The local bank made and owned the loan and had a vested interest in making a loan that would perform.

My understanding is that every foreclosure costs the lender about $150K. If that figure is wrong let me know.

Meanwhile, in retrospect, is there a regulatory process that could have prevented this? I believe in the market as much as the next guy but the interconnectedness of finacial markets these days militates to avoidance of the fallout from subprime lending and other unsound financial practices.

Regards.
 

loop garoo, you wrote:

"My legal assitant obtained a subprime loan which got her into trouble but which she has refinanced successfully."

You have mischaracterized the reality.

Subprime loans are a very good thing and they have been around since the dawn of lending. In fact, many banks in the US have a long history of accommodating borrowers with questionable credit histories. Lenders are in the business of lending. But that means they are in the business of assessing borrowers and setting odds on the likelihood those borrowers will repay what they borrowed.

There are many strategies subprime lenders use to improve the odds of repayment while they hedge themselves against losses. Private Mortgage Insurance is one tool. High downpayments are another. Higher interest rates are used to compensate the lender for assuming additional risk.

Meanwhile, there are numerous assistance plans offered by state agencies to assist first-time homebuyers. Plans include downpayment funding, subsidized interest rates, discounted property, and more.

Furthermore, borrowers are motivated in many ways. Some are buying a first home and have a short credit history. Others have spotty credit histories. Some are speculating on rising prices in the real estate market. None of these reasons disqualify a buyer. Nobody buys a home to lose money.

Like your assistant. She bought a home because it's a smart thing to do. She financed it with the most available and least expensive loan. If, by saying she got into trouble, you meant that she obtained an adjustable-rate mortgage that she could not afford after the expiration of the introductory rate, two points arise.

1) She lied to the lender about her capacity for repayment.

2) She lied to herself about her capacity for repayment.

However, based on your statement that she successfully refinanced her subprime loan, it is clear that, in truth, she took a financial risk by acquiring property with a subprime loan, and sharply reduced her risk by engaging a new creditor. It sounds as though she experienced nothing more than elevated blood presssure while she searched for a creditor willing to give her better terms.

Presumably her credit profile improved from the time she bought the property with the subprime loan and the time she refinanced. In other words, she's now an experienced hand at the real estate game. I offer her my compliments.

You wrote:

"1) People should not borrow $ they cannot rpay;"

Does anyone but a person bent on fraud borrow money that he cannot repay?

and:

"2) Brokers should not lend $ to poor credit risks;"

You'll have to define "poor". Creditworthiness is a continuum, not a binary condition. There are lenders who only lend money to the highest rated borrowers, and there are those who serve the huge market of borrowers who lack the AAA rating.

Consider this. A credit card gives its holder the power to borrow without a dime of collateral in the hands of the lender. In other words, all the risk of default is carried by the credit card company. This is "unsecured lending".

Credit card companies have learned that it is possible to earn reasonable profits by distributing huge numbers of cards. This strategy results in high default rates; many people stiff the credit card companies. But the losses due to non-payment are offset by the high interest rates charged by card companies.

Here's a fact. If you look at the Income Statement for a credit card company, you will see that Earnings Before Bad Debt Allowance is an impressively high number. Like Microsoft's bottom line. But after the credit card companies adjust results for non-payment of bills, the profits shrink by more than 50%. However, they are still high enough for the companies to continue the strategy of saturating the country with cards. This is subprime lending.

If a house is repossessed by a lender in a foreclosure, the house is available for re-sale, perhaps for more than the previous owner paid. Credit card bills rarely include the purchase of recoverable assets. That money is gone.

and:
"3) lenders should not bundle such loans as securities; services should not rate them as good investments; and financial institutions should not have invested in securities backed by such loans."

Wrong. Totally and completely wrong. It is the evolution of markets and the process of securitization that has resulted in much of the growth in our economy.

The Great Depression should inform you on this topic. To make a very long story short, many of the problems that punished the country in that period would have been rapidly checked if our markets were more connected, as they are today.

We face plenty of economic problems, and problems will always emerge in the areas we did not foresee. But it is almost unimaginable that we will repeat the errors of the 1930s -- and Roosevelt made many -- as we settle today's mortgage issues.

You wrote:

"...the flaw in the system that allowed this problem to flourish ab initio is the prevalence of nationwide lenders who initiaite such loans and then sell them."

Wrong again. In my view, the flaw arose in the manner in which securitized loan portfolios were evaluated.

Like life and life insurance, we know everyone will die. But for insurance purposes, insurers need more precise estimates. Thus, statistically speaking, insurers -- actuaries -- know with stunning accuracy the number of people who will die within given periods. However, the actuaries may not know the individual identities of the soon-to-die. But their numbers are easy to count.

The flaw in analyzing securitied portfolios of loans arose when rating agencies awarded them ratings that were too high. However, Wall Street has a long history of discounting the analysis of Standard & Poors and Moodys and Fitch. It appears to me that too many Wall Streeters -- excluding the guys at S&P, Moodys and Fitch -- saw too much risk to their paychecks to drill deeply into the contents of the bundles of mortgage securities they were buying.

Like anyone with insurance, the participants began telling themselves the risk was low because, hey, the bundles of securities were rated AAA by S&P, thereby absolving them of further fiduciary responsibility. Didn't work as well as planned.

However, the markets have thrown the babies out with the bathwater. In the standard Fear & Greed scenario that ALWAYS dominates Wall Street, the players are now operating in high fear mode. Dumping stocks like Washington Mutual, which is down 50% this year. It's dividend is now over 11%! Banks that have never issued a subprime loan are suffering from sharp declines in stock prices.

This too shall pass. Wall Street firms are now rushing to declare huge writedowns. But these writedowns merely set the stage for stunning recoveries next year. Wall Street firms are practicing kitchen-sink accounting. Writing down every non-AAA loan. Guess what? No mass death of mortgages is pending. The normal patterns will prevail. Unless, of course, the government gives borrowers an incentive to default. Like making it painless.

You wrote:

"In the old days, one went to one's local banker who knew the property and knew you. The local bank made and owned the loan and had a vested interest in making a loan that would perform."

In other words, you yearn for a return to the days of red-lining and discriminatory lending practices. I've got news for you. The local banker you've mentioned is a guy who wouldn't loan money to blacks, hispanics, or recently arrived immigrants. He was one person in the pageant of people whose work had the unintended consequence of creating slums and unstable neighborhoods.

The emergence and growth of the subprime loan industry accounts for most of the increase in home ownership among those who were historically denied access.

As a resident of Brooklyn, I can tell you entire neighborhoods that had been left for dead are now booming because lenders, due to the existence of securitization of loans, were prepared to accept the risks of lending to borrowers with questionable credit buying homes in troubled neighborhoods. That's where the bargains were found.

Today there are no more bargains in Bedford-Stuyvesant, Williamsburg, Fort Greene or other Brooklyn neighborhoods because they have rebounded as a result of surging owner-occuppied properties.

You wrote:

"My understanding is that every foreclosure costs the lender about $150K. If that figure is wrong let me know."

I find the figure too high. But if you accept that it is accurate, isn't a loss of that level sufficient to deter lenders from making bad loans? A profit of $150,000 on a single loan is inconceivable unless millions are loaned. But the average homebuyer buys a house with an average value around $150,000, probably less. Therefore, if the lender were to experience a loss of $150,000 for one bad loan, the lender would fail if even a tiny percentage of borrowers defaulted. Nobody gets ahead that way.

Lenders make money by lending to people who can repay their loans. Every default cuts into profits.

You asked:

"...is there a regulatory process that could have prevented this?"

Sure. Pass laws that mandate discriminatory lending practices. Then places like NY City would see a return to the days when headlines screamed "The Bronx Is Burning." The days when landlords realized arson offered better returns that renting apartments.

You wrote:

"I believe in the market as much as the next guy but the interconnectedness of finacial markets these days militates to avoidance of the fallout from subprime lending and other unsound financial practices."

There's nothing unsound about lending money to people with weak credit histories. Every credit market has its AAA borrowers and its CCC borrowers. In the corporate world any rating below BBB is considered "junk."

Should lenders refuse to lend money to companies with "junk" ratings? If so, then kiss GM and Ford goodbye.