The future of interest rates

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Janet....those were just a few that I found rather quickly but I think the number added up to more than $20B. I know I am making assumptions but if second-lien is failing I would have to assume that first lien is not to far behind.
 
<p>Janet,</p>

<p>Pick a few lenders, vintages/years and credit levels and I can give you some examples later today. Also Countrywide has specific pools for their option arms. I can tell you they are not performing well at all when compared to the rest of the industry. I would say that it would be pretty easy for me to find $20 billion in the 2006 vintages. What no one talks about are the 2005 vintages and the 2004 vintages which are just as ugly.</p>
 
<p>How about: IndyMac 90% stated / 5/1 ARM / 620 score / With MI / Made in 2005?</p>

<p>Are you able to drill-down that much?</p>

<p>This type of loan would have been popular.</p>
 
<p>The 2005 vintage is kind of "hot" (high alchohol flavor - masks the pain of reset).</p>

<p>OK, I need to shut up now. </p>

<p>OnTopic: <a target="_blank" href="http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml">Daily Yield Curve</a> is up:</p>

<p>1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr </p>

<p>2.47 3.12 4.17 4.15 4.11 4.19 4.32 4.44 4.64 5.04 4.98</p>
 
It is very possible that it won't matter one iota that the prime mortgages are performing much better than the subprime that is getting so much press. As the Alt-A and prime mortgage MBS get revalued downward, even in smaller amounts than subprime MBSs, the holders of the MBSs have to throw them on the market at a less than profitable trade because the MBSs have been used as collateral in leveraged trades. As the MBSs get revalued, the holders get margin calls. As the MBSs go on the market and have to be sold at whatever price the seller can get, all similar MBSs get revalued at the new and latest selling price. It creates a downward spiral, exactly the opposite of the upward spiral that created all the loose and expanding credit. Goldman Sachs can not go out and use a pile of MBSs as collateral for a loan if it is unprofitable to do so. And they are hesitant to purchase more of the same thing. Now, do you see why it may not matter one iota how good the underlying asset is?<p>


And none of this is even taking into account all the credit default swaps that the big five wrote and may now have to make good on. If they start paying out on CDSs, an MBS for sale will look worse than ... , well I can't think of a good analogy right now.
 
<p>You are absolutely right about that Awgee.</p>

<p>Ratings do not address market value. </p>

<p>That was the second (and possibly bigger) mistake in all of this - ignoring this simple fact.</p>

<p> </p>
 
Just thought of a semi-appropriate analogy. Let's say Sam bought a 4 bedroom 3 bath home in 2005 brand new for $1 mil, and all Sam's neighbors bought the exact same house for the same price at the same time. Forward to 2007 and Wilma, down the street from Sam, sells her home for $800,000 because she needs the cash. No matter how great Sam's house is and no matter that Sam's uderlying asset is exactly the same great house that it was in 2005, he could probably not get much more than $800,000 for his home, and probably less if he is getting a margin call and needs the money now.
 
<p>EvaL - I do get his emails but I don't always get around to reading them. Do you recall what date that email went out? If not no big deal I will look for it. I try not to delete them thinking I will get around to reading them one day.</p>

<p>Janet - Of course you pick IndyCrap. They have more MBS pools than swimmers. That and it is not any wonder investors had not a clue as to what they were buying because the prospectus' are horriably written. I can't drill down to specific loans but I can find percentages of the type of loan in the pool. </p>

<p>Anyway here are two examples. The first one is a June 2005 subprime $835mil deal with an average FICO of 633. The current balance is $401mil with 13.9% $55.7mil REO, in foreclosure or BK and 7.65% $30.7mil is 30-60 days late. The majority of this pool was 2/28s and 3/27s but some 5/25s.</p>

<p>The second one is a September 2005 ALT-A $300mil deal with an average FICO of 675. The current balance is $201mil with 11.82% $23.8mil REO, in foreclosure or BK and 11.34% $22.8mil 30-60 days late. Over 40% of this deal was 5/6 or 5/1 mortgages and 37% was full doc, 50% stated and 12% NINA, no ratio etc. </p>
 
Mauldin letter was either from this past Friday/Saturday or the Friday/Saturday before. You can skim them to find the one I'm talking about because it has a graphic of a Bloomberg terminal in the body of the text.
 
Okay in October of 1981 mortgage rates were 18.45% with 2.3 points per Freddie Mac:


In January of 1987 the rate was 9.2% with 2.2 points


Give or take interest expense was halfed in 6-7 years?


http://www.freddiemac.com/pmms/pmms30.htm





That obviously made homes substantially more affordable. Home prices went up substantially over that period as people were able to afford higher prices at the same payments.





A change from a 6% rate to a 8% rate should in theory reduce house prices by 25%. Rents tend to increase though since renting is more attractive than buying a house that is declining in value though so it isn't quite that simple.
 
<p>Graphrix,</p>

<p>Why the Indycrap comment - are their pools performing especially bad?</p>

<p>The numbers don't look good.- the 14% REO is startling. Since the pool is half the size it was originally - most of the strong hands have prepaid one way or another - what remains is the dregs. The second one is not much better.</p>

<p>Where these loans made nationally?</p>

<p>I stand corrected if they're all like this. </p>
 
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