Comments on: The second-mortgage underwriting failure http://blogs.reuters.com/felix-salmon/2010/02/08/the-second-mortgage-underwriting-failure/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: najdorf http://blogs.reuters.com/felix-salmon/2010/02/08/the-second-mortgage-underwriting-failure/comment-page-1/#comment-11853 Mon, 08 Feb 2010 23:28:07 +0000 http://blogs.reuters.com/felix-salmon/?p=2498#comment-11853 Sloppy post Felix. The chart above is post-writedown and/or post-runoff as of Q3 2009 and tells you nothing about the issuance model. Consider:

http://www2.standardandpoors.com/spf/pdf  /media/subprime_cm_dislocation_090308.p df

This S&P article puts second-lien ABS issuance between 2005 and 2007 at $150 billion (bottom p.7) – they were selling as fast as they could. Banks distributed a lot of product, some of which paid off investors after refinancing and much of which went to zero. Also any really bad 2005-2007 second lien is no longer on the books because it’s been through foreclosure. Banks currently hold such a high volume due to the near-complete shutdown of the ABS market, particularly for residential second liens. All the stuff that was in their pipelines in 2007/2008, which they probably would have loved to get rid of, was unsaleable. Some of the stuff written more recently in reasonable markets may actually be decent quality, if the income is well-documented and they charged a good premium. Think of someone with a good, stable job who waited to buy a nice California condo until 2008/2009 and took a lot of debt because rates were low and they didn’t want to liquidate stocks.

You are correct that much of the volume was acquired by BofA when they bought Countrywide, but of course this retention of credit risk was not a rational choice on the part of Countrywide but an unplanned disaster that would have wiped out their company if not for the acquisition. Anyone who was not a TBTF bank and was writing a lot of second-liens failed – mainly due to zero recoveries in defaults which erased these second liens – thus, it’s inevitable that a large fraction of remaining second liens will be held by large banks.

What will happen is the same thing always happens when you have a lot of bad debt that no one wants to recognize – it will be resolved in grinding, interminable fashion in bankruptcy court. Existing contract and bankruptcy law is our best effort to resolve debt problems fairly, and to imagine that politicians, lobbyists, and bankers are going to generate a better plan mid-crisis is a fantasy. A few smart people will make a lot of money and everyone else will feel lousy. In the long run the housing stock will be redistributed to people who can hold it, some banks will fail, and some new banks will arise. Nothing exciting to see here, move along.

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By: Brad9999 http://blogs.reuters.com/felix-salmon/2010/02/08/the-second-mortgage-underwriting-failure/comment-page-1/#comment-11842 Mon, 08 Feb 2010 19:32:38 +0000 http://blogs.reuters.com/felix-salmon/?p=2498#comment-11842 At issue is that the first lien can’t be modified without paying off the second, or getting the second to agree to re-subordinate.

So, if the holder of the first thinks they will recover $100k in a foreclosure, but $150k in a modification or short sale, the junior lien holders threaten to refuse consent, and force foreclosure, unless they are kicked-back some of that $50k difference.

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By: wcw http://blogs.reuters.com/felix-salmon/2010/02/08/the-second-mortgage-underwriting-failure/comment-page-1/#comment-11835 Mon, 08 Feb 2010 17:30:17 +0000 http://blogs.reuters.com/felix-salmon/?p=2498#comment-11835 Rules are rules, and sometimes the rules do not wipe out junior debt to zero before starting to hit senior debt. If you are senior debt, you absolutely must know the rules inside and out, and if they bite you, it is your fault.

Not to put too fine a point on it, but neither the law nor the debt markets are or should be your mommy.

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By: Sandrew http://blogs.reuters.com/felix-salmon/2010/02/08/the-second-mortgage-underwriting-failure/comment-page-1/#comment-11828 Mon, 08 Feb 2010 15:12:10 +0000 http://blogs.reuters.com/felix-salmon/?p=2498#comment-11828 How did we get to a state where first lien holders are even considering sharing in the loss of principal before the second lien holders get wiped out? Never mind the gall it takes for a 2nd lien holder to think she’s owed anything. But what possible power does she have to pressure the primary mortgage holder to even entertain the notion?

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