Why did Americans (and Spaniards and Irish) borrow so much against housing in the 2000s, only to find themselves stuck with more debt than assets? It sounds like a simple question, but it’s surprisingly difficult for economists to agree on an answer.
The standard approach is to attribute the excesses to changes in the behaviour of lenders, who, for whatever reason, became much more eager to give mortgages to people they previously would have avoided with terms they previously would have considered reckless. (For more on the European cases, see here.)
For example, about a third of all mortgage debt originated in 2005 and 2006 was either subprime or “alt-A”, according to data from Inside Mortgage Finance, compared to the stable 1990-2003 average of about 10 per cent. Subsequent experience tarnished these product segments so badly they effectively disappeared. Read more
So how are US car loans doing these days? Well, from Fitch on Thursday:
Delinquencies on U.S. subprime auto ABS have reached a level not seen since 2009 with underperforming loans from recent vintages driving the increase, according to Fitch Ratings. Read more
The drop in oil prices – with WTI now drifting down towards $46 a barrel – has been nothing short of stunning.
On that note, here’s an interesting thought from Chris Flanagan, head of US mortgages and other structured finance research at Bank of America Merrill Lynch. When this securitisation veteran sees the fall in oil prices he thinks of one thing – the ABX index. Read more
Here is a cartoon of a GPS unit, represented by a robot, repossessing a car bought on credit by a McDonald’s employee on minimum wage. The robot is repossessing the car, using new technology, to pay off some greedy bankers who have been bundling subprime auto loans into subprime auto asset-backed securities and then selling them to equally greedy investors.
Are you outraged yet?
No? Then stay with us.
As opening paragraphs go in English court cases involving subprime lending — they surely don’t come more sublime than this (hat-tip PreachyPreach).
In 2011, the first two claimants (“Mr Shearer” and “Mr Dawes”) were enjoying large country houses and expensive London flats while bogus solicitors were attempting to collect money due on high interest loans on behalf of their money-lending business, Logbook Loans. They could hardly have imagined that, in 2013, they would be asking real solicitors to invoke equity on their behalf to escape the burden of interest rates on their own debts which are at a level which Logbook Loans’ erstwhile customers might have thought modest…
And there’s much more in Shearer & Others v Spring Capital Ltd & Others: Read more
Is the new fad for securitising commodities creating dangerous parallels with the subprime crisis? It’s an observation we made the other day. But it turns out we’re not the only ones to share this view.
The logic is simple. If by leveraging housing stock — using the stock as collateral — the process of mortgage securitisation encouraged subprime lending to people who (arguably) couldn’t afford them, could leveraging commodities in the same way be encouraging equally uncouth lending practices? Read more
Goldman Sachs, Barclays Capital, Bank of America and Credit Suisse will bid for $7bn worth of subprime mortgage-backed securities from the Fed’s Maiden Lane II portfolio when it comes up for auction on Thursday, the FT reports. The sale has been restricted to the four banks, who will bid based on interest from their clients, reflecting lessons learned by the Fed from an abortive auction of the assets last summer. The Fed will either sell all $7bn securities to one bank, or not sell them at all, the FT adds. A good price for the securities could spark a rally in subprime debt, by tying up a good portion of the supply overhang held by the Fed.
Seems the only way to describe Bank of America’s CDS curve after Monday’s (margin?) disaster. Citi appended for contrast:
Interesting USDA chart, pointed out by Big Picture Agriculture:
Wells Fargo has been hit with a record $85m civil penalty by the Federal Reserve over allegations it had steered borrowers into subprime loans and falsified information on mortgage applications, the FT reports. The fine is the largest penalty the Fed has levied in a consumer protection enforcement case and is the first time that a regulatory agency has taken action over faulty subprime practices, the Fed said in a statement on Wednesday. The bank will have to compensate customers who were eligible for lower interest rate loans but were persuaded by Wells Fargo Financial staff to take out costlier subprime loans. The fine also settles allegations that salespeople at the unit exaggerated borrowers’ incomes on loan applications to make it appear that they qualified for loans for which their true incomes would have made them ineligible.
Morgan Keegan, a Tennessee investment bank, has agreed to pay $210m to resolve civil US regulatory charges that it defrauded investors in five bond funds by inflating the value of mortgage securities during the financial crisis, the FT reports. Including the deal, the Securities and Exchange Commission has now collected approximately $1.6bn from big financial institutions in settlements linked to the financial crisis. The pact follows a deal reached on Tuesday in which JPMorgan Chase agreed to pay $154m to resolve SEC charges related to its sale of collateralised debt obligations – a pool of assets tied to mortgage securities. Regions Financial, which owns Morgan Keegan, simultaneously announced that it had hired Goldman Sachs to conduct a “strategic review” of its investment banking business. The bank said the review did not include Morgan Asset Management, its investment advisory business, which is a party to the multi-regulator settlement.
JPMorgan Chase and Royal Bank of Scotland have been sued for more than $800m by the US credit union regulator for alleged mis-selling of mortgage-backed securities in the first of an expected series of lawsuits seeking to recover “billions” of dollars, the FT reports. The National Credit Union Administration filed suits in Kansas City on Monday as part of an attempt to recover losses on a $50bn portfolio of assets, which it inherited when it seized five failing wholesale credit unions after the financial crisis. In court filings, the NCUA said that the sellers, issuers and underwriters made “numerous material misrepresentations” in the offering documents. This “caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial”
After seeing 51 banks in Florida fail since the start of 2007, some of the regional survivors are finally beginning to make loans again, reports the Wall Street Journal. The first quarter saw 29 Florida banks increase their total loan volume by at least 5 per cent compared with the end of 2010, according to the Federal Deposit Insurance Corporation. The modest rebound, the WSJ says, is a contrast to the overall decline of 1.7 per cent in total loans at the nation’s 7,574 banks and savings institutions, the fifth-steepest drop in 28 years. But many banks are still struggling to overcome piles of bad loans, while some institutions with plenty of capital are having trouble finding enough eager, qualified borrowers. The paper adds that most of the fastest-growing banks are new, meaning they won’t have made as many loans before the financial crisis erupted.
CQS, the London-based credit hedge fund that is one of the biggest of its kind globally, is preparing to shut to new investors its asset-backed securities fund – known for its successful bets in the US subprime mortgage market, the FT reports. The CQS ABS fund is the second the firm has elected to close, highlighting the extent to which the most successful fund managers are again beginning to restrict capacity as they did at the peak of the credit boom. CQS’s total assets under management have nearly doubled to $11bn over the past 18 months as investors have rushed back to the once-stricken hedge fund industry.
Rochdale Securities banking analyst Dick Bove is mildly annoyed this Monday.
Having reversed his position on Goldman Sachs and its alleged subprime short after Andrew Ross-Sorkin sprang to the bank’s defence last week — it seems Bove has become the focus of some criticism. Read more
Goldman Sachs, trying to counter a Senate subcommittee report that is fueling investigations and suspicion of the firm, plans to accuse the subcommittee of drastically overstating Goldman’s bets against the housing market in 2007, the WSJ says, citing people familiar. The firm is considering releasing documents about its mortgage bets that are aimed at showing what Goldman officials claim is sloppy math and incomplete analysis by the Senate. The information might be released soon on Goldman’s website. Bloomberg adds that the criminal investigation of Goldman by the Manhattan District Attorney’s Office has at its disposal a 90-year-old New York law that makes it easier for state prosecutors to bring charges than their federal counterparts.
The man of many words has gone silent. Read more
Here’s something you might have missed during last week’s (UK) holiday.
Michael Cembalest has made a retraction. JPMorgan’s private banking chief investment officer (and reportedly the only JPM-er who refused to do business with Ponzi-schemer Bernard Madoff, according to Forbes) has a new view on the roots of the US subprime debacle. Read more
Eighteen months, $6.39bn of toxic assets, a $12bn loan and a pandaemonium of accounting shenanigans later…
…We’ll ask again, what exactly was the point? Read more
Citigroup will sell a $12.7bn portfolio of subprime loans, MBS and corporate bonds in order to comply with bank capital rules on risk, reports the FT. The decision, revealed in the bank’s first-quarter results, led to Citi to take a $709m pre-tax charge but enables it to sell the assets into a recovering market for distressed debt and to prepare for Basel III’s phase-in of new risk-weightings for assets. Three-quarters of the portfolio has already been sold at prices above the levels at which Citi valued them on its balance sheet. The move offers a rare public look at bank efforts to shrink their balance sheets, with Barclays also having revealed plans to wind up Protium, a toxic asset portfolio supported by a Barclays loan.
US Senate investigators probing the financial crisis will refer evidence about Wall Street institutions including Goldman Sachs and Deutsche Bank to the justice department for possible criminal investigations, officials said on Wednesday. Carl Levin, Democratic chairman of the powerful Senate permanent subcommittee on investigations, said a two-year probe found that banks mis-sold mortgage-backed securities and misled investors and lawmakers, the FT reports. According to the LA Times, the senate report also said Goldman “profited from the financial crisis,” with $1.2bn made in the bank’s mortgage unit alone in 2007. Forbes thinks criminal charges could follow. Reuters has a summary of the report.
Prices on a key subprime bond index have doubled since the low of the financial crisis they helped cause, as investors search for yields from subprime and RMBS, reports the WSJ. Prices have risen from 30 cents on the dollar to roughly 60 cents. As part of the quest for yield, investors are also seeking nonagency bonds, which are not backed by Fannie Mae or Freddie Mac, in addition to subprime. A revival in jumbo mortgages with lower interest rates also reflects investors’ return to the market. The Fed’s sale of Maiden Lane II portfolio assets will increase investor interest, with four major life insurers considering purchases, sources told the Journal.
Regulators are set to flesh out a crucial area of housing finance reform on Tuesday when they propose which mortgages are sufficiently risky that lenders should retain a financial interest in the loans, says the FT. Officials will propose that loans in which a borrower makes a 20 per cent downpayment should be exempt from the new risk retention rules, according to people familiar with interagency talks. In other mortgages, lenders would have to keep a 5 per cent financial interest. Defining the risk retention rule is crucial to reviving the private-label securitisation market, banks say — although others insist that high downpayments would disadvantage small lenders.
Here’s a chart to ponder from the peer review of residential mortgage practices, just published by the internationally-coordinated Financial Stability Board:
Now there’s a title, from a new BIS working paper, to catch one’s eye.
In it, the authors tackle the issue of information asymmetry in the securitisation process — or the basic idea that the holders or creators of a security might have better information about the investment than potential buyers. Read more
That’s an old Valentine’s day letter — sent on February 14, 2008 — from John Lyons at the Office of the Comptroller (OCC) to Citigroup CEO Vikram Pandit. We bring it up because it’s the subject of a new column by Bloomberg’s Jonathan Weil, provocatively titled; “What Vikram Pandit Knew, and When He Knew it.” The document itself was released recently by the the Financial Crisis Inquiry Commission. Read more
Back in 2005 in Springfield, Massachusetts…