Posted on 09/29/2008 7:20:29 PM PDT by PhilosopherStones
Current value of mortgages in the US: $12 trillion
Current 90 day late/default rate (all loan types, sub-prime/Alt-A, jumbo, prime): 4%
Current exposure: $480 Billion
Hypothesis: 90 day late/default rate doubles.
Hypothetical 90 day late/default: 8%
Hypothetical exposure: $960 Billion
Hypothetical value of underlying Real Estate (based on worst-case as in CA Central Valley, Las Vegas, Florida): 60%
Total exposure risk: $576 Billion.
That's it folks. If (worst case) defaults double and the underlying assets sell for only 60% of their original selling price, our total exposure is less than the "bailout" amount.
Now all the housing experts can flame away!
Interesting. Once foreclosed, the asset is the house, not the mortgage. There is no mortgage anymore.
"Waiting for the bailout to make them whole I would bet."
There is no provision in the bailout for foreclosed houses. Of course, if credit loosened up, there would be more demand for the house and the price would increase.
70 cents on the dollar is a bargain. Housing prices have declined by 20 percent. Add in the foreclosure costs, and the bank would be making money at 60 cents on the dollar.
That’s why I posted the hypothetical doubling.
Most of the sub-primes are already out of the system.
Next up is Alt-A (No doc, but good credit rating).
After that will be prime.
At each level, we get a greater percentage of the total US mortgage market, but a lower percentage of defaults (Primes had their ability to repay checked and, generally, were smarter about the types of loans they took).
When the cost of carrying them exceeds the market price of the house, then yes.
The entire credit default swap market is over $60 trillion.
I don’t know how much of that is on mortgages.
Not an expert, but didn’t this bill also put us on tap for failing debt riddled municipalities and cities and towns? I was kinda scared there for a minute I’d have to help bail out Detroit and Chicago, Cleveland, Providence, LA, New Orleans (oh, wait I did that one already)...and maybe the slums of Brazil, oh, yeah and Kenya...and maybe cities under the ocean, Barney Frank’s bath-house and all of Hyde Park, Frankfurt, Bin Laden’s cave network, as well as every roadside attraction, tennis court and shabby Dentist office in America. I was going to help a beekeeper in Muncie, too (Page 77 of the Bill) So I was a bit worried.
If 8% of the $12 Trillion worth of mortgages in the US go into foreclosure and are sold at 60% of the original loan value, lenders will be on the hook for $576 Billion.
That’s what I meant.
Thane_Banquo: “Problem is we have become an incredibly risk averse country.”
Definitely! That’s the same thought process that said the war was lost after we’d suffered 5000 casualties. Unfortunately, our political class is very adept at feeding on our fears in order to stay in power.
You are not including the decline in the value of the collateral asset (i.e., the house).
Mortgage lending at 5.25% APR is a loosing proposition if housing prices are declining by 10% a year.
Have you taken into account the truckload of ARMs and had low initial 3 year to 5 year rates that are about to kick up adjust to the current higher rate.
And what about all the people who have now seen the value of their houses fall below the amount they owe on the mortgage and decide to that they’d rather default and take the credit hit than be pay $300,000+interest for a house that’s only worth $250,000.
And yet the legislation is still in effect to grant high risk loans when the market recovers....
The real exposure is less than that because there are assets and partial income streams behind those mortgages. The problem of course is not mortgages, it would take 100 or 200B at most to fix that. The problem is worthless securities that are NOT mortgage backed, not backed by anything. One example is credit default insurance resold or booked as an asset. It is nothing but a piece of paper. There are many trillions of that.
As I understood it, the banks still have the asset(house) on the books at the full original value. If they depreciate it to what they could sell it for, doesn’t it force a write down at the bank, their assets shrink?
Why else would they not want to sell now, even at a loss. It will be years before prices recover and they have to maintain the property.
We have had a decrease in house prices of about 27% in the local area, but it is starting to tick up.
It’s all the same risk, just parceled out into different forms.
People keep thinking that CDS are some sort of multiplier. They’re not. They just take the same original risk and try to hedge against it.
There is the crux of the problem. The bank lent because it had the money because the mortgage industry was awash in cash because Fannie Mae was guaranteeing all of these crap loans.
Dump money into the system and you get inflation. Economics 101.
Assume 95% of the loans are good, and 5% are bad.
So to model this, take 9.5 ounces of vanilla ice cream, and mix in 1/2 ounce of dog feces. Eat the mixture. Can you taste dog feces? What? You threw up? But it was only 5% dog feces, why did such a small amount make you sick?
gogov: “What do the banks do with the houses. Just give them away?”
It depends. If the bank can afford to hold the house, it might appreciate. They might even be able to rent it until the market turns. On the other hand, they might need to sell it for whatever they can.
Where most people see disaster, I see incredible opportunity. For those who have cash, this might be a one-in-a-lifetime chance to pick up some valuable assets for pennies on the dollar.
I’m talking about the existing mortgages. 95% of them are performing and generating a revenue stream of $600 billion per year for the banks.
That should be the first place we look for bailout funding.
Thanks for the laugh! ;Oh it was funny because it was too true.
It sounds like the fed keeping interest rates so low for so long may have added considerable fuel to the fire. Plenty of people suspected that long ago.
I know we kept getting calls about interest only home loans ... didn’t sound like a good idea to me — LOL.
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