Calculated Risk on "fixing" mortgage securitization

Funny stuff. Full article here. Not sure I have anything I can add to this...

But a whole lot of these loans that are failing right now were originated as 100% CLTV stated-income loans, because the guidelines agreed to by the issuer allowed that. I am scratching my head over the logic here: I spent most of the early years of this decade, just as a for instance, blowing my blood pressure to danger levels every time I looked at the underwriting guidelines published by ALS, the correspondent lending division of Lehman. ALS was a leader in the 100% stated income Alt-A junk. And I kept having to look at them because my own Account Executives keep shoving them under my nose and demanding to know how come we can't do that if ALS does it. I'd try something like "because we're not that stupid," and what I'd get is this: "But if ALS can sell those loans, so can we. All we gotta do is rep and warrant that they meet guidelines that Wall Street is dumb enough to publish." Every lender in the boom who sold to the street wrote loans it knew were absurd, but in fact they had been given absurd guidelines to write to. What on earth good did it do to have those originators represent and warrant that they followed underwriting guidelines to the letter, when those guidelines allowed stated income 100% financing on a toxic ARM with a prepayment penalty?

Starting in 2007, investors rapidly pulled out of the 2/28 ARM subprime product. They just announced they wouldn't buy it any longer. And it went away. You do not have a bunch of mortgage brokers still selling 2/28s to borrowers, or correspondent lenders still throwing 2/28s into new securitizations. As you might have noticed, you don't have new securitizations. You always had the power to click your heels together three times andIl poker texas holdem online è un gioco di carte. return to the land of just not buying the paper, but I guess you didn't know that until the pink witch showed up.

And you will note that what immediately happened after you all stopped agreeing to those goofball underwriting guidelines was that a bunch of marginal originators immediately went belly-up. That's all the business they could get: writing junk paper for foolish investors. You put them out of business. You should not be sorry about that, except for the part about how you did business with them for so long that now you might have a bunch of worthless contractual warranties. This is called learning by doing. The solution to it is not to go back to buying any old dumb loan that you can get someone to offer a warranty on.

MBIA breaking up too

From Dealbook.

MBIA, the world’s largest bond insurer, said Thursday that it was withdrawing from the Association of Financial Guaranty Insurers, citing disagreement on the future direction of the bond insurance industry.

MBIA, based in Armonk, N.Y., has been struggling to preserve the triple-A credit ratings it needs to keep winning new business, as losses mount from its coverage of debt tied to subprime mortgages.

Joseph W. Brown, who replaced the ousted Gary C. Dunton this week as MBIA’s chief executive, said the industry must split up its business of insuring municipal bonds from the often riskier business of guaranteeing other securities, including those linked to mortgages.

He also said MBIA disagreed with the trade group’s positions on whether monoline insurance guarantors should cover credit default swaps and reinsure various United States financial guarantee insurance transactions with foreign affiliates without paying American corporate tax rates.

MBIA said it had been affiliated with A.F.G.I. since the trade group was formed in 1986.

Subject: re: fgic break-up

good chat with a reader

Subject: re: fgic break-up.

you call it a good move to split the company in two. how do you think that's going to get past the policy holders who bought policies based on the strength of the whole company. i don't see how this doesn't end up in litigation dead-lock (if it even gets there). the idea takes away any remaining financial foundation for insurance holders on mortgage-backs.

my response

It is going to be lawsuit central.

But the bond insurers don't have a choice. They are bankrupt otherwise because they are going to lose their ratings and then they are toast. So when the alternative is a zero outcome, they might as well play for holding their muni business and dealing with the lawsuits. The regulators want this outcome to protect the muni market. And so the counter-parties will get bought off with some money / equity / whatever from the muni business because their alternative is a big fat zero.

Needless to say I have zero sympathy for either side of this game.

A) investors who bought crap, added a slice of undercapitalized insurance and it is AAA

B) the insurance firm that insured some ridiculous multiple of their equity capital based on models which probably took the last five years of defaults and extrapolated them out.

Just my opinion

will post more if/as it comes.

FGIC to split

From WSJ

Financial Guaranty Insurance Co., a major bond insurer, has notified the New York State Insurance Department that it will request to be split into two companies.

One of the firms would likely retain much of the business of insuring structured finance bonds such as those backed by mortgages, which have come under severe pressure due to the housing market slowdown, according to a person familiar with the matter.

The other company would likely retain most of the municipal bond insurance business, which is stronger, the person said.

Good move. Likely only chance to save the muni business. the other side is probably doomed.