Do they just lose all the $$$ or do they get to own the foreclosed properties in US?
ymc Wrote: ------------------------------------------------------- > Do they just lose all the $$$ or do they get to > own the foreclosed properties in US? not to sound snobby, but do you really know anything about this topic? You seem to be making a statement in the title without knowing anything in the body of the text. If you’re going to ask a question don’t do that.
I don’t know much outside of the wikipedia entry, so I want to know more and see what will be the impact on the mortgage industry. I read from some news article that foreign banks actually bought some products that has a good Moody rating but is a mixture of good loans and bad loans. I suppose this is a type of MBS. But I am not sure exactly how this is structured.
ymc Wrote: ------------------------------------------------------- > I don’t know much outside of the wikipedia entry, > so I want to know more and see what will be the > impact on the mortgage industry. > > I read from some news article that foreign banks > actually bought some products that has a good > Moody rating but is a mixture of good loans and > bad loans. I suppose this is a type of MBS. But I > am not sure exactly how this is structured. MBS is backed by the mortgage, which is backed by the asset of the house. Thus, the investor’s only recourse is back to the house in the case of an asset under duresss. Banks will usually purchase a pool of assets, they’ll be a mixture of all sorts. Most of the time companies try to bifurcate two programs, subprime and prime (although all will most likely be alt-a, otherwise they’d be sold to Fannie or Freddie). These two programs will naturally have the entire spectrum of mortgages within the sub-categories. Technically, the investors will own the houses, but will look to sell them as soon as possible, in fact it is a requirement that they do so. The servicer/seller will try to sell them through different means, but until that time the houses are trust property.
Thanks for your reply. So what exactly is the structure of the products those foreign banks bought? I suppose that each US asset has only one MBS which is likely owned by one US bank. Then this US bank then pool a bunch of MBSes to form a lower risk MBS. This lower risk MBS is then sold to foreign banks. Is this the MBS those foreign banks bought? If so, in case of default of one asset, the US bank will foreclose the asset. Then get the proceed and repay the foreign banks proportionally?
You can’t pool bunch of MBSes to create another MBS. MBS is created by pulling mortgages together. High quality MBS are issued by Fannie and Fredie and they consist of conforming morthgages mostly prime loans and loans that meet the required standards set by Fannie and Fredie, such as borrower income/mortgage value, etc. The non-conforming mortgages are also pooled together into MBS, those are issued by commercial banks, and consist of alt-a loans, subprime loans, and other more riskier loans. When these MBS are issued both US banks, foreign banks, and regular investors, such as hedge fund managers and pension fund managers buy them. The MBS securities are divided into different tranches based different prepayment speeds and other assumptions. These structured products are relativelly straightforward since collateral is known. The investor knows if he is buying MBS based on prime or subprime loans. What happens next is another structured product is created CDO (collateralized debt obligation) which is a pool of different debt instruments, such as MBS, ABS, investment corporate debt, junk bonds, etc. And here where the main problem lies. When many CDOs were created, they consisted of quality debt (MBS based on prime loand and investment grade debt) and what’s called “toxic waist”, which included a good deal of risky debt, such as subprime mortgages. Again, when CDO is created its broken down into tranches, its usually given an investment grade rating of atleast BBB-, since most of the colaterall is quality debt, but some portion of it, which usually becomes an equity tranche has a good deal of the “toxic waist”, i.e. subprime loans and its the most vulnerable tranche of CDO. When original borrowers default on their loans, equity tranche of CDO takes the hit first and investors in that tranche could lose their entire investment. At some point when the CDO structure is busted, the assets will be liquidated, the senior tranches will get repaid since they have the most protection, but mezzanie tranche and equity tranche will get little if anything and that’s how many US and Foreign banks, as well as, individual investors who bought this stuff will pay the price for chasing the high yield of these CDOs without properly accessing the risks of buying them.
…and crazy housing prices will return to earth to await the next credit cycle.
Volkovv - That’s “toxic waste” not “toxic waist”. ymc - If you invest in securitized mortgages whether through MBS, CDO, or any other way, there is no chance that someone will send you the deed to some house in Omaha. If everything about that mortgage goes to heck, the house will be auctioned and the proceeds will be used to pay off the mortgage. There may then be a judgement against the home owner which, I suppose, would be property of the trust. I’ll bet in some liquidating CDO situation you could pick up judgments like that really cheap.
JoeyDVivre Wrote: ------------------------------------------------------- > Volkovv - That’s “toxic waste” not “toxic waist”. > > > ymc - If you invest in securitized mortgages > whether through MBS, CDO, or any other way, there > is no chance that someone will send you the deed > to some house in Omaha. If everything about that > mortgage goes to heck, the house will be auctioned > and the proceeds will be used to pay off the > mortgage. There may then be a judgement against > the home owner which, I suppose, would be property > of the trust. I’ll bet in some liquidating CDO > situation you could pick up judgments like that > really cheap. Dammit, I thought the only downside to all the junk I own was that I would wind up with a sweet Florida condo.
I think I understand now. CDOs can be a collection of MBSes. The i-banks then separate CDOs to tranches that have different debt seniority. The i-banks underwrites the CDOs by keeping the portion with lowest debt seniority to themselves. In general, the part of a CDO that has lower debt seniority will have higher yield. Many foreign banks bought low seniority CDOs because they thought it is ok to be in the same boat of the underwriters. But because the US housing correction is too severe, so the underwriters lose all their part of CDOs and the foreign banks who bought the middle level CDOs (the mezzaine tranch) also suffer huge losses. Does that sound right?
you guys have no clue.
skiloa Wrote: ------------------------------------------------------- > you guys have no clue. Please enlighten us. While I don’t work in the MBS world, I do work in the ABS world and have structured products similar to MBS. 1. Mortgages sold in the trust are backed by houses. 2. Defaulted mortgages that aren’t repurchased (Can be if not a GOS FAS140 transaction) are essentially defaulted and are thus worthless as paper. 3. However, the home that is collateral for the defaulted mortgage is still property of the trust. If the mortgage is repurchased, then the proceeds go to the trust as recoveries. If it is not repurchased then the sale proceeds from the foreclosed house go to the trust. I could be wrong, as I said I don’t do MBS, but I know ABS. Until collateral is released anything in the trust, including the physical asset, is property of the trust. Essentially, since the trust is for the benefit of the investors, the investors own the asset. FAS140 naturally has regulations for the disposition of those assets, they must be sold quickly, since the trust cannot technically hold any assets besides loan collateral. I know that there are trusts out there that intentionally blow this treatment, meaning they can hold a physical asset indefinitely, blowing the treatment. Companies do this so they can adhere to everything in FAS140 without having to go off balance sheet, since they would prefer to have the assets on. I am not sure how the house work-out happens, but until the collateral is released, it’s the trust. If you know, please tell since I would be interested. Never looked at an MBS deal in-depth.
just one note to add, which is that a lot of the senior tranches are valuable if held to maturity, assuming that defaults aren’t super highly correlated (which they could be, but no one knows exactly how much correlation to expect). A lot of the problem with the trading of AA tranches comes from concern that credit defaults are going to be highly correlated because the subprime defaults that strategistss have expected for some time are now racking up. To me, it seems like they will be more highly correlated than previously expected but less so than feared (ie overreaction). Therefore, as an income source, it might now make sense to buy some of the most senior tranches, provided that you are expecting to hold to maturity, rather than try to trade them at a later date. Junior tranches are highly suspect, though, at least as i see them.