Skip to comments.Some mortgage meltdown math
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!
Problem is we have become an incredibly risk averse country. We want government to help us out of every little bump and scrape.
No flame from me (25 years in mortgage banking). Sounds like you may have overstated the worst case scenario.
So let’s start selling the bad debt now. Why don’t the banks want to do this? Locally banks are getting bids of 70 cents on the dollar or so for foreclosed houses and won’t sell — there was a piece on local TV last night. Why not? Waiting for the bailout to make them whole I would bet.
Do you have any idea what is going on at the banks holding the mortgages?
What...you mean that prices come down to where they should be? Making them more affordable?
Gee..letting the market work...what a concept!
The big problem isn’t the underlying mortgage values. The big problem is the Credit Default Swaps that were written on top of it all.
Sure! Nothing like taxing someone who doesn't own a home...to provide a bailout that props up home prices artificially even more!
For point of reference, $1.3 TRILLION of market wealth was wiped out today in the U.S. alone. Over $3 TRILLION globally.
Is the exposure the DIFFERENCE between the loan amounts and the asset values? In this case $384 billion?
That home I said used to sell for $435,000 and was listed at $260,000. It is now at $134,000.
What do the banks do with the houses. Just give them away?
What is the estimated value of the worthless credit default swaps on these estimated defaulted mortgages? How does that affect the situation?
As I’ve posted elsewhere, MBS derivative risk is a convergent series (toward zero) because any deravtive will have LESS risk than the original obligation. And given the premium for off-setting the risk, the derivative risk is generally substantially less.
So first order derivatives are less risky than the original.
Second order derivatives less risky than the first order, etc.
Second, include the market-based insurance program which was part of the plan.
Third, realize the bailout is initially only $250B, not $700B.
Combine mark to market elimination, the private insurance program, and the phase one $250B on the CDO market, and estimate the stabilization effects of those actions.
Compare to your $576B.
As I understand it, although the bad mortgages are the underlying cause of the financial problem, it is the derivaties that these banks/investment institutions bought and sold that is the driving force for the meltdown.
The flip side of the coin is the psychological part. It appears that banks are not lending money until they understand where they are with respect to their own assets. How to deal with that?
How do you replace that kind of money in the economy?
There isn't really anyone left to borrow from. Just printing up the money creates other huge problems.
If we don't recapitalize the markets soon, the entire economy grinds to a screeching halt. I've never been an alarmist before, but this is the most serious financial crisis I have ever seen in my lifetime.
I think someone is blowing smoke 3:1 spread is a lot. My wife is an inactive Realtor, houses don’t price this way for no reason. There are 16,000 houses up the road, that are on the books as foreclosed. None have this sort of swing. Most are 20-30% drop. Some maybe 50% if they are in a bad location. Average price in our area is down 27% or so.
What do you think is up with that? Someone just got taken in the bubble? But then why did the bank finance, don’ they know about appraisers?
Unless — Could be just an outlier, bank desperate, I do know of rings of bad apples that were flipping homes that just got indicted, so ... We had local waterfront homes that were priced double what they should have been, but those were speculators.
“Is the exposure the DIFFERENCE between the loan amounts and the asset values? In this case $384 billion?”
The exposure also includes the securities that are derived from the original debt, very leveraged, multiple of 12-30 times the original debt exposure.
Here’s my math:
$12 trillion in mortgages
5% in trouble = $600 billion
95% are performing and banks are making, say, 5.25% PER YEAR in interest on the outstanding principal = $598.5 billion in interest revenue made EACH YEAR by the lenders.
Difference = $1.5 billion
They leant the money. They charge interest to cover their risk. The interest made in one year completely covers their losses if the 5% of bad mortgages are utter losses.