I was thinking that freezing sub-prime rates will stop/reduce the defaults (we all focused for a year on the 'reset schedule') so my thinking is that freezing these rates will cause ABX to climb since they are no longer subject to :' Who knows how many more will default as their rate reset higher' (ABX - more than anything else point to sentiment about sub-prime loans. A stop in resets will improve this sentiment)

Suvh a change will open up the nearly dead MBS market - SIV NAV will improve and the market will get unstuck from where it is now.

but KD at the ticker think that ABX will colapse - I wonder what am I or him is missing - seriously I am trying to understand why preventing defaults and forclosures are so bad to banks - if they would think so why would they go loang with Paulson proposal ????? - here is KD quote:

"The entire "securitized structure" - the ABX and everything behind it - depends on the credit enhancement from the interest rate spread, and the reset process as loans age. This is where they get the protection that allows them to rate big parts of these tranches as "AAA".

If you remove that the entire collateral structure collapses. The result of this sort of thing, if it really is what people are claiming it will be, is going to be the following:

The ABX will collapse. All of it. Those who hold these pieces will see their actual realized losses go parabolic. This isn't a matter of models and what people think they're worth any more - now the last piece of rug left, the credit enhancement component, is being ripped out from under them.

You can forget about getting an ARM loan that could potentially be securitized in the future. Ain't gonna happen. There are literally several trillion dollars out there in this stuff, and you can forget about a market for them in the future."

There are many things you are missing!

You are assuming that freezing rates applies involves some kind of formal regulation and that it will save home all home owners having ARMs. Neither of these are true. You are witnessing politics at its best in the past couple of days. The rhetoric does claim they will save thousands from foreclosure, but the formal facts would likely not even result in double digits! I am serious….. it save a lot less than a hundred from foreclosure in the manner described.

If you read the rhetoric you will see that it is indicating a VOLUNTARY program from lenders. In reality this likely means the rhetoric is announcing what lenders (meaning COUNTRYWIDE and ONLY COUNTRYWIDE) are already doing to try and save people from going into foreclosure. Afer all it is a VOLUNTARY program. Countrywide’s answer would be exactly the program spelled out by Arnold, and now Paulson.

The truth is they are already attempting to prevent foreclosures by offering fixed rate programs BUT ONLY for people who ARE NOT behind in their mortgage payments and who meet FHA guidelines. That in itself denies almost every homeowner facing foreclosure from being able to apply for the fixed rate terms. AND… it is not clear that it will be fixed to the TEASER rate as many have implied! In fact they are likely offering these fixed rates ONLY when it can be paid by a higher spread, NOT a teaser rate. Furthermore applicants must PROVE they cannot afford to continue to pay their mortgage at current rates! So…. Only those current in their mortgages can apply BUT they must show they cannot afford to pay their mortgage under current rates! A CATCH-22 wouldn’t you say! How many people can meet those terms?

FHA has indicated they are tightening monitoring of applications to their guidelines to make sure applications they previously allowed will be denied, so in fact fewer applicants will qualify for Freddie or Fannie underwriting.

It’s difficult to understand why the feds would even contemplate a program that relies heavily on CFC as a servicer when CFC itself doesn’t appear to have plans to be an ongoing concern in 2008.

The ExCWInsider, which needs to be taken with a grain of salt, indicates their servicers have a 10:4:1 ratio. They call 10 leads of which 4 apply for their fixed rate terms but only 1 qualifies. In the near future perhaps it should be called a 10:4:1:0 ratio to indicate the number that actually get sold to Freddie or Fannie!

I hear others on this board stating that SERVICING is where the profits are. I don’t see that in ANY of the balance sheets. HELLO!!! As long as people are not in default the Servicing may have BEEN where the profits WERE. Well…. Times have changed. People are defaulting. Now SERVICING means constantly calling exasperated homeowners at the end of their means trying to get them to bring their accounts up to date. Where’s the profit in that?? And the servicers themselves are feeling exasperated by conversing with these poor home owners. If that wasn’t bad enough they are also paid based on the number of loans they close, so you can understand why they are exasperated. The ExCWInsider board also has a few ex employees indicating they were being required to work in excess of 8 hour days but only being allowed to claim 8 hour days because CFC doesn’t pay overtime.

In their SEC filings FANNIE has indicated COUNTRYWIDE is their largest servicer. They best have plans now to replace them if they aren’t going to be around in 2008!


Regarding the ABX… a VOLUNTARY program to freeze rates in a manner that does not IN FACT freeze rates for MOST ARM holders will NOT save the ABX from imploding. (Maybe ZEROING at this time would be a better description).

Analyzer,

Thanks for your reply. Indeed there are many facts which I am missing (and still do) I still do not understand why KD think that the credit enhancement (lower rated trenches protect the AAA trenches by absorbing the 1st defaults) is causing the proposed rate-freeze to cause ABX going down - in my mind it is the other way and I will explain:

As you point out the plan will be for those who are still current on their mortgage but have difficulty to pay further - I am sure many people in this category are those people who are going to have their rates RESET UP during 2007/2008 (we all have been watching the reset schedules graphs for a year now)

The ABX are down because there is FEAR of INCREASED default rates. No one can know - who among that now are current is going to default next - clearly a rate- increase increases the odds of default GREATLY.

So now come this rate freeze (and you are again correct saying that banks have quietly been doing this already - but that is the rub - to do this they had to use qualified loan officers to qualify those people and also get agreement from the MBS/Mortgage holder) Now this will be done - not universal - but in a more wider way and would involve more banks, more homes - and thus would require less thorough checks on a person by person basis (i.e. more such adjustments can be done in a short time - since until now loan officers have been some kind of a bottle neck)

The end result is that for the next 3 years the PROSPECTS for ADDITIONAL defaults should be greatly reduced. Once this FEAR is removed ABX will go up, mortgages will be traded and SIV will be protected (plus the housing market may not fully recover but will be out of downward spiral it is now)

--------------------

Now maybe my view is wrong and your view is correct (always possible) but I have two questions:

1. If this is so bad - why Paulson wants it ? and why banks/mortgage holders will agree to it ?

2. In the short term - what will be stock market perception to such a deal ? I think the market will love it.

Yal,

Lets say someone was willing to give a loan to J6P at a teaser of 5% rising to 9% after two years. Consider that in the mad subprime lending frenzy, risks were being ignored. In a normal risk environment, J6P would never get the loan or would get it at 15%. What is the value of a loan paying 5% when investors really want 15% risk adjusted? Also note that in Paulson's scheme lender will be locked into this loan and will not be able to claim default and try to salvage whatever he can by foreclosing and dumping the rapidly depreciating underlying asset. I would guess that these two factors combined would make even first loans worth south of 50c on the dollar, possibly as low as 30c on the dollar. This will cause an instantaneous implosion of the SIVs with these loans.

Another effect of the government mandating a freeze is that the risk premium on mortagaes in the US will shoot up. Lenders will want compensation for the normal credit risk as well as the risk that the US government will come in and lock them into losing loans when it wants. This has the potential to destroy lending for a long time which in turn will kill the credit based economy. As a corollary, house prices will crash and burn. This in turn will make any "locked" loans worth even less.

I agree with others who have metioned that this reeks of desperation worse than the MLEC idea. If the is the best Paulson can come up with, the situation is nothing short of dire.

Gigi,

I agree that the situation is dire but I still claim one thing:

ABX now represent sentiment and FEAR of the unknown number of defaults that is ahead.

If you freeze rates to people who until now paid the teaser rate (and thus most of them can still continue to pay it) this fear will go down considerably because much of the ("what will occur when rate reset") unknown is now removed.

in other words: ABX are projections. Have they now reached the worst possible scenario - maybe maybe close. If Paulson trick remove volatilty in a price of known magnitude of losses - this allow a market to function again. right now it does not function at all.

By doing this this though surely it just adds more to the principle owed...thereby digging a bigger hole for the borrower

Yal, nobody can really figure out what will happen unless they know the approximate pool which we don't know yet.

The ABX-HE are indices made up of securitized mortgages. First, we don't know if this will even affect those since the investor may protest and you would need legislation (not just a suggest from the Treasury Dept) to do that.

Second, if the loans are modified, they are often bought out of the pool backing the security, so they aren't in there anyway, yet they have the effect of reducing the payer portion so the default portion may rise.....but, we don't know because we don't know the pool that it affects yet.

Third, you need access to a CMO/ABS calculator to evaluate this These are structured products with principal and interest cashflows routed to different tranches depending on how much comes in in any one month. Though the assumed default rate is important to value these bonds, and the spread (sentiment), so is the coupon. Also, you are only talking about the 2/28s or 3/27 ARMS collateral.

Nobody can really make blanket statements about what will happen until we have enough data in order to study it, and it must be studied using structured product calculators. It is just too complex.

I will tell you, though, that if this isn't voluntary and becomes law, the market for these subprime ARMs will go away because no investor will want to touch them with such low yield for so much risk. I guess the market has kind of gone away anyway, though....

So far, we just don't have enough details, and IMHO it just looks like more political BS/lip service that will affect very few people.

Looks like we are going to be FURTHER cutting rates.

Based on the broken trend line it LOOKS like the dollar could very well be headed higher.

Rate cuts have been synonymous with LOWER dollar up till now - why would the dollar go UP in the face of rate cuts this time????

Sandra,

I am trying to figure out what will be in the market come monady or whenever this deal is announced.

I think that this is being marketed as "reduced defaults" "keep people paying mortgages and at home"

You guys have seen this table right???

Look at the "Wala" column, that's the age. Yes, it is 15 months!!! Still 10 months to Reset for the ARM. Also, not everything is ARM 2/28, 25% is Fixed Rate!!!!

So tell me, if someone's defaulting during teaser period, what is the use of freezing the rates at teaser?

Is this supposed to be magical thinking?

here is a smaple of sentiment:

http://messages.finance.yahoo.com/Stocks....

they look at the plan as "forclosure reduction plan" - this is how it will be marketed....

MTGSPY:

should I repeat ? OK you have shown 20% defaukts before the reset of rates but the ABX look forward trying to guess what would be the defaukt rate AFTER the reset.

So maybe stopping the rate increase redce defaukt range from 50%-60% to 25%-30% ? this is a great improvment.

Much is unknown about the way people will behave in the future when their rates reset - now this unknown is reduced by keeping their rates where they are.

Questions I have as well:

1. How crowded is the short ABX trade these days, and would that make it any easier to push around for end of the year window dressing for IB's?

2. How many of the current defaults are due to resets (50% or less?)? Does negative HPA stop, or continue and provide additional homeowners with the incentive to default?

3. How does this save any time or money over traditional loan mods as 'eligibility' must still be determined on a case by case basis?

4. Backlash anyone? Both from those who have ARM's but are deemed able to suck it up and take the reset and the responsible folks who saved and got a fixed rate mortgage (who I suspect are regular voters, be interesting to see a correlation to that and those who own free and clear)?

5. Yal, I think you nailed it on the last comment there - it is more marketing - and ultimately that is about all it will be unless it makes things worse (this whole ****storm is product of not taking our medicine).

6. Bubblesee, my WAG is if there is a big selloff or crash grade market event the dollar will spike hard and those who got into dollar positions in advance will profit.

This won't happen. Just the Treasury and FED talking up the market. If they lock the interest rates they will also have to rebate the yield premiums paid on the origination which assumed a long term rate. That's why all the banks got into them, they yielded 10%. But just as the borrowers get a freeze, the investors and banks will want their money back.

Mtgspy, that's partly my point, they are not going to freeze rates for those who are delinquent or can't afford the teaser. And they aren't going to help those with fixed-rate loans which do back a bunch of deals out there. These people are defaulting in droves. The plan is only supposed to be for the limited number of people who are current on their loans, but can't afford the reset. How big is this pool? How will they determine it? This is too complex to measure the outcome now when we don't have enough details.

Well, fwiw, since we are the interest rate premium holder of some whole loan ARM 2/28 and NIM accounts and NOT the credit risk, we will sue the government if one $ of our investment is affected. If successful then really this would make up for the shortfall of my lack of mortgage investing insight for this year.

Mtgspy,

Exactly - if this many are defaulting BEFORE resets due to a combination of negative HPA and fraud - freezing resets ain't gonna get you there no how.

Yal,

How do you qualify people and how many are in that category and how many are stupid enough to take the deal on a rapidly depreciating asset? It is a combo marketing/stall ploy IMNSHO.

Energyecon,

I think you are saying that the markets may very likely tank EVEN though the fed lowers interest rates (because JUST lowering rates without marking to market does NOTHING to truly solve the problem).

The tanking markets create a need for US dollars thereby driving the dollar higher.

Yes????

Yal,

Q1:
should I repeat ? OK you have shown 20% defaukts before the reset of rates but the ABX look forward trying to guess what would be the defaukt rate AFTER the reset.
A1:
The increase was 1% default a month going now to 2.25 more a month. At this rate, by reset we are looking at 40% default. Now at that point I expect 30% of the pool PREPAID. So there's 30% left. How much of the 30% to default at this point if they haven't prepaid? Do I think it's the reset? Doubt it. At month 24 their finances is not worse or better on average than 25. They are wishful about the house prices coming back up to refinance.


Q2: So maybe stopping the rate increase redce defaukt range from 50%-60% to 25%-30% ? this is a great improvment.
A2: Look at the above. Also since probably you aren't trading this. The 30% that prepaid from 2006 goes into, YUP, you guessed it, the DEFAULT IN 2007 DURING TEASER RATE. REALLY. We tracked them and 40% of those refi are now 60 days+. MUCH WORSE than the original 2007 ITSELF. So desperation Refi is worse than magical thinking, just a few counterintuitive point most haven't learned yet.


Q3: Much is unknown about the way people will behave in the future when their rates reset - now this unknown is reduced by keeping their rates where they are.
A3: Look at the above about a)defaulting at teaser rate, and b) defaulting at teaser rate after getting a refi. It's not wrong to be hopeful Yal, but look at the data. It's telling me as investor not to EVER go LONG CREDIT until house prices showed another ponzi scheme.

Bubblesee,

My WAG or SWAG (Wild Ass Guess or Silly Wild Ass Guess) - yah - if you buy dollars at or near record low then there is some kind of ass kicking selloff when the dollar bear trade is one of the most crowded in recorded history (slight exaggeration) that would seem to have the ingredients for some kind of meteoric squeeze play...and the Fed cuts on the way to 1% didn't do too much for the markets when the US was heading into recession the last time.

mtgspy,

Yes I agree on "not to EVER go LONG CREDIT until house prices showed another ponzi scheme" but I still worried about how this will be marketed and I can see hugh jumps in CFC, FRE, FNM and all other realted stocks we are shorting (me included)

Well Yal, we all are and that is not something you worry about if you know what REALLY is happening out there. Buffett sold his entire petrochina at $180 and it still barrelled ahead to 250 before, yup, going back to 180 and having no taker cuz it's exposed for what game it is now. I am hedging the short with FRE calls which I will close at 40-45 bucks (1 more day I think) and go short fulltime. At this point I don't feel I need any long position to hedge.

Perhaps the details behind E-Trade's mortgage investment portfolio can shed some light as to whether this problem is much larger than the "subprime" borrower who is current now on the Teaser but wouldnt be able to make the payment on reset so we will save them. I think all along we have heard how small or contained this problem is - you know just subprime and only a small subset of this pool. But step by step we are hearing problems in the prime/ Alt A. It appears now with the loose lending standards that in fact there is very little reliance one can place on the credit worthiness or inherent risk levels of prime/Alt A. it is beginning to look like it is just one large pool of serious risk.

The E-trade portfolio had - from what I have read - 70% money purchase firsts that were categorized as prime borrowers. This is where the bomb lies.

What is the Treasury and the "HOPE SPRINGS ETERNAL OR WHATEVER THE **** BULL**** NAME WE PLACE ON THIS" coalition doing for the mortgage holders in the "prime" category that cant make their payment or sell them homes? Not a damn thing

One other thing that I cant figure out. The incentive for the HOPE group to play this game. They are not going to do this without getting something in return. Is it a) regulatory support for not writing down the mortgages, b) capital requirement relief, c) allowing them to continue to record neg amort or capitalize interest income, d) what is it?

Saying they are doing this to avoid foreclosures is not enough for me to believe that they would undertake this effort - particularly since it is laden with contractual problems visavi the MBS/CDO's - without some major concession that helps support them financially or helps support their market values.

Spy,

thanks for sharing your situation - it's so rare to hear from someone in the trenches actually dealing with these comnplicate issues.

May I ask some questions?

Doesn't a trustee hold the securitization assets on which you have NIMs etc?

Don't you actually benefit from lower prepayment rates?

Are there specific restrictions on the trustee's ability to modify individual loans "in the best interests of all classes overall."

Shouldn't your first legal action be against the trustee rather than the government if you are dissatisifed with modification?