July 19, 2007

URGENT FLASH: Nautilus Capital issues panicked "liquidate your inventory now" recommendation. Systemic mortgage meltdown now firmly underway


And then the whole house of cards caved in...

Wow. Thanks
Blown Mortgage for the tip. Here's the full warning letter

And again, remember these words HP'ers. Remember these words: MARK TO MARKET.

Loan sale pricing is not going to improve in the foreseeable future; in fact, it will probably get worse. Unless you are prepared to hold the loans to maturity, our advice is to liquidate your inventory now. You may not like today’s pricing, but you will like tomorrow’s even less.

As everyone in the industry now knows, most mortgage loans ultimately wind up on Wall Street in a securitization trust. The securitization market thus plays a vital role not only in pricing in the secondary market, but also in establishing underwriting criteria. An illustration of market-driven tighter lending standards was provided by today’s announcement that subprime 2/28 ARM loans will no longer be purchased by many investors. This is a direct result of recent changes by the rating agencies (Standard & Poors, Moodys, etc.), who determine the subordination and overcollateralization levels necessary for the different risk grades (or “tranches”) of the securitization trusts. If you have any such loans in your inventory it is probably too late to sell them except in the scratch & dent market.

Separately, several recent events are having a significant adverse effect on loan pricing, of all credit grades. The bankruptcies of a number of large subprime lenders (the latest being Alliance Bancorp, last week) is well known, but what is not widely understood is that their portfolios are being dumped on the market in huge volumes by their creditors. Similarly, a pair of highly-leveraged mortgage hedge funds managed by Bear Stearns recently collapsed, causing near-total losses to their investors. Their portfolios are being liquidated, but the sales apparently are not going well; rumor has it that only a small portion has yet been sold, and at a significantly higher discount than anticipated.

These massive sales are depressing pricing across the board. Prices on the ABX indices (used by mortgage bond traders to manage risk) have declined severely in just the last week. The trend lines for the AAA and BBB- tranches (the highest and lowest risk grades, respectively) are shown in the graphs above. Note that the AAA line, which was stable for so long, has now collapsed. Investors in these highest-quality bonds, who once thought they were immune to credit quality issues in the underlying loans, are now not so sure. The BBB- tranche, which is necessary to support pricing for all the higher grades, is trading for half of what it was in January.

What this all means to lenders is that loan prices are dropping precipitously, and you should complete any pending sales (premium as well as scratch & dent) as quickly as possible. If you have received a bid on a pool but have not yet decided whether to accept it, check with your investor; the bid may no longer be there. If it is, hit it now.

18 comments:

Kenduffelsniffenspotzen said...

This could be the start of something big. Time teaches many lessons. But unfortunatly it kills all of it's students.

Anonymous said...

Someone call it - he's dead

Dr mel said...

Oh that is not looking good...wait - The Dow is soaring, and the economy is growing. Never mind all is well.

Andy in San Diego said...

The words are scary, but the chart shows a change of 2%...

Morgan said...

Let's just say I'm glad I'm not holding any loans for sale. I can imagine all of these smallish banks secondary marketing officers just sitting there pale as their bids get countered left and right...

Anonymous said...

Keith,

Not a related item, but I just saw that Wal-Mart has 70 stores in China. Does that mean that the Chinese are buying our cheap American-made crap?

Anonymous said...

1929

Anonymous said...

Dr mel said...
Oh that is not looking good...wait - The Dow is soaring, and the economy is growing. Never mind all is well.

July 19, 2007 5:32 PM
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Dr Mel I concur, just as in all previous economic downturns the stack exchanges are the last one's to "price in" the fact that the economy is tanking. This usually has the affect of exacerbating the impact of the market correction because suddenly everybody runs for the doors and the result is an overshoot of the correction when the market crashes. Everybody is on vacation and doing other things. The market is continuing to soar on this light trading that is blind to the billions of dollars evaporating in the CDO/MBS hedgefund world. When everyone comes back in the fall and needs to come up w/ cash to cover their margins, they will liquidate that which is liquid (stocks) and we'll have another stock market crash that will suddenly be the big news that no one saw coming. Not because they could not see it, but because the chose not to see it, i.e. willful blindness.

borkafatty said...

Oh that is not looking good...wait - The Dow is soaring, and the economy is growing. Never mind all is well.

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All is well in the land of induced methamphetamine use..but here in the real world sir...we are sinking like the Lusitania..and the Life boats are going down with the ship.

Those who think this Economy is thriving are the ones who are going to burn first...and from the looks of things...gold will not save you in this down turn.

westwest888 said...

"There will be a ripple effect of forcing funds to rebalance their portfolios by selling things in a market where there just aren't many buyers. Eventually there will be demand again for securities backed by subprime loans, because the higher-rated bonds in the subprime class are still decent investments. But that won't happen until everybody takes a bath first." - Guy Cecala, publisher of industry newsletter Inside Mortgage Finance (Forbes, July 18th)

steeliekid said...

@ Andy in SD, Lever that 2% drop 10 to 15X and tell me that ain't a big hit.

Ron said...

Hmm....when life gives you lemons make lemonade...right? However, this looks like a big giant stinking pile of crap...what make a crap sandwich?

I am waiting for the RE trolls to put a spin on this, it is amazing how many people are clueless or choose just not to believe or research this. I will be prepared, however the way this is shaping up I am not sure that investing in gold is the answer...it is getting spooky and maybe a case of bullets and an escape route is the best plan with the way it is looking. We are just starting, this will be one of the biggest history making events of our life time I would assume.

Anonymous said...

Dr mel said...
Oh that is not looking good...wait - The Dow is soaring, and the economy is growing. Never mind all is well.

July 19, 2007 5:32 PM
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The private equity bubble is bigger than the housing bubble. And it's still inflating, hence the rising DOW.

Budvar said...

"Stock prices have reached what looks like a permanent high plateau... I expect to see the stock market a good deal higher than it is today within a few months" Irving Fisher, Professor of Economics, Yale University, Oct 15, 1929

"The markets generally are now in a healthy condition... values have a sound basis in the general prosperity of our country" Charles E. Mitchell, president of the National City Bank, October 15, 1929

The more things change, the more they stay the same!!

Hows it go again? Ipod phones are selling like hotcakes and the dow just hit $14k, and lets not forget the immortal unemployment is 4.5%, the economy's booming.

I sure wish this anon bozo had put his name to this, still when he takes a dive out the office window he can tell us all on the way down "So far so good".

Andy in San Diego said...

OK, I gotcha, steeliekid.

Anonymous said...

Thw DOW is made up of 30 companies out of thousands. When one of those companies performs poorly, they are yanked out of the DOW and replaced with a healthier one. Anyone who thinks those 30 companies represent the economy is stupid.

I will stay with foreign equities, as they will outperform the slumping debt-riddled US economy. There is no need to worry though, as the college educated baby boomers are being replaced with tens of millions of illiterate illegal immigrants. That should give our economy the boost it needs to compete with Asia and Europe this century.

Anonymous said...

since these turkeys have played so many games with the mortgages etc......i would think that the owners of these homes could legally wiggle out of the contract.......this is case law of course...

just ask them to show you the original signed contract for the house you live in and then you will be more than happy to leave the premises.....until that time, you will not leave......

that should throw a monkey wrench in the proceedings.......because these assholes never have the original contract and almost always they never can produce the original contract.......and since so many people have been brought into this situation due to this financial dog and poney show called derivatives......well....who then is the holder in due course of the instrument? the judge would be scratching his head if the home owner asked that question in a show cause hearing.....

5 would get you 10, the home owner would not have to give up the house nor would he have to make payments......but the title would be clouded and probably never cleared up but maybe not....

if i was behind on my payments i would tell them to go fish......what do you have to lose?

Anonymous said...

You know why modern architecture is so gawd awful, with all these sheets of featureless glass? Because in 1929, so many rich execs opened their windows and jumped out. So rather than change the economic system and levers of power, they took away their ability to open their own windows and smear themselves all over the pavement.

King of the Bitter Renters