A Second Mortgage Disaster On The Horizon?

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A Second Mortgage Disaster On The Horizon?
60 Minutes: New Wave Of Mortgage Rate Adjustments Could Force More Homeowners To Default

Dec. 14, 2008
The Mortgage Meltdown

Scott Pelley reports on the mortgage crisis that's far from over, with a second wave of expected defaults on the way that could deepen the bottom of the U.S. recession. | Share/Embed

(CBS) When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started. Nearly two trillion tax dollars have been shoveled into the hole that Wall Street dug and people wonder where the bottom is.

As correspondent Scott Pelley reports, it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you're beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what's coming.

One of the best guides to the danger ahead is Whitney Tilson. He's an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.

"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."

In 2007, Tilson teamed up with Amherst Securities, an investment firm that specializes in mortgages. Amherst had done some financial detective work, analyzing the millions of mortgages that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the sub-primes, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgages.

"It was data we'd never seen before and that's what made us realize, 'Holy cow, things are gonna be much worse than anyone anticipates,'" Tilson says.

The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

"The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall," Tilson explains.

"What you seem to be saying is that there is a very predictable time bomb effect here?" Pelley asks.

"Exactly. I mean, you can look back at what was written in '05 and '07. You can look at the reset dates. You can look at the current default rates, and it's really very clear and predictable what's gonna happen here," Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.

"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" Pelley asks.

"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."

"How do you know that?" Pelley asks.

"Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they're being asked to pay today," Tilson says.

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Op woensdag 24 december 2008 02:36 schreef Papierversnipperaar het volgende:
Zijn die ook gebundeld en massaal verkocht aan Europese banken?

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AEGON
Hypotheek gerelateerde beleggingen

In het derde kwartaal was er ook een sterke daling in de waarde van hypotheek gerelateerde beleggingen, met name van near prime residential (RMBS) en commerical mortgage-backed securities (CMBS).

De risico’s in AEGON’s hypotheek gerelateerde portefeuille zijn duidelijk toegenomen. AEGON heeft regelmatig verwezen naar een deel van de subprime portefeuille waar de meeste afschrijvingen worden verwacht, namelijk van effecten met als onderpand subprime hypotheken met een variabele rente, zogenoemde hybrid ARM’s, beleggingen met een initiële rating van AA. Op 30 september had AEGON EUR 0,5 miljard van dergelijk beleggingen, minder dan 19% van de totale subprime beleggingsportefeuille van EUR 2,7 miljard.

AEGON heeft ook belegd in andere hypotheek gerelateerde beleggingen, onder meer in effecten met als onderpand near-prime hypotheken, zogenoemde Alt-A en negative amortization/Option ARM floaters. Het grootste deel van deze portefeuille is super senior en zo opgezet dat hoge verliezen op het onderpand kunnen worden weerstaan. Zelfs in het geval van zware verliezen op het onderpand, zullen verliezen op de hoofdsom beperkt blijven.

Meer dan 86% van AEGON’s commercial mortgage-backed beleggingen hebben een senior of super senior AAA rating en kunnen zware verliezen op het onderpand weerstaan zonder verlies op de hoofdsom. Obligaties zonder AAA rating zijn conservatief afgesloten.

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Op woensdag 24 december 2008 08:48 schreef Basp1 het volgende:
Wanneer de rente zo laag blijft staan als deze nu al staat en de banken in de VS zouden dit ook naar de klant door rekenen zou er niet al te veel met die ARM hypotheken aan de hand moeten zijn. Dan moet wel de rente de gehele looptijd van die hypotheken zo laag blijven staan wat toch nooit zal gebeuren.

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I hope this helps to clear up some of the confusion surrounding option ARMs. I felt it was necessary to clear up some of the details of these mortgages to put an end to any notion that lower rates are somehow going to buffer $500 billion in option ARM recasts over the next few years. It won’t. It is all about the price.

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S&P Warns — Again — on Alt-A First Liens

Standard & Poor’s Ratings Services said earlier this week that its ratings on 9,430 classes from 1,077 U.S. first-lien Alt-A RMBS transactions issued in 2005, 2006, and 2007 had been placed on CreditWatch with negative implications — otherwise translated as “downgrade imminent.” The affected classes had an original par amount of approximately $552.83 billion, and have a current principal balance of $445.43 billion, the rating agency said.

It’s almost becoming a yawner to see more RMBS downgrades, but what they mean should not be lost on any market participant, even if they’re increasingly common and the hundreds of billions of dollars involved now seem a numbing figure to most of us covering this mess.

A review of the thousands upon thousands of classes by HousingWire shows that roughly half of the at-risk bonds are currently rated AAA by the rating agency; downgrades to securities rated AAA are likely to lead to further write-down pressure for banks and insurers already hard-hit by ratings downgrades.

S&P said the ratings warning came on the heels of a Feb. 24 update to the agency’s loss severity assumptions for most Alt-A transactions. S&P cited a “belief that the influence of continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and more declines in home sales may depress prices further and lead loss severities higher than we had previously assumed” on recent Alt-A deals.

As of the February 2009 distribution date, severe delinquencies — 90+ days, foreclosures and REOs — have accounted for an average of 22.92 percent of current aggregate pool balance for affected transactions, S&P said. And, over the past three months, severe delinquencies in affected deals have risen by a sharp 24.5 percent, illustrating the pressure much of the Alt-A space is now facing.

S&P last made major cuts to private-party RMBS deals in early February. Read previous coverage.

The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels (how many investor presentations have we seen in recent months touting the percentage of securities held rated AAA?). Would-be buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices, and then justify the hit that so doing would have on the rest of their books.

With many of these AAA high-fliers falling officially off their perch, that dynamic appears set to change further.