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