Wednesday, September 29, 2010

ROBO-FORECLOSURES – A PANDEMIC IN THE MORTGAGE SERVICING INDUSTRY

JPMorgan Chase announced today that they too may have been part of the robotic foreclosure process that Ally Financial acknowledged is a major issue for them. In a memo distributed last night, JP alerted its attorneys that employees in its foreclosure operations may have signed affidavits without the required personal knowledge.

As the third largest servicer in the country, with over $1.3 trillion in its servicing portfolio, even a 0.1% impact would be huge. And that percentage is not out of the realm of financial impact to the company. Litigation exposure, on both the default borrower side as well as investor backlash, together with any regulator penalties, could cost the company millions. JP has taken the same “stiff upper lip” posture as Ally, claiming that the factual information given in the affidavits was accurate and was not affected by whether or not the signer knew the details. So, it will come down to the courts to decide what type of penalty to impose.

And like Ally, JP is now requesting that courts not enter judgments on pending foreclosures until they figure out what was done and how to fix it. Well, there goes securitization investor cash-flow some more as foreclosures get put on extended hold. This will also cost JP money, as it too now has to wait for its reimbursement of funds in the securitization cash-flow waterfall.

It seems that in their race to foreclosure, proper processes were laxed (kind of like the underwriting standards that got the industry into the mess to begin with). I guess it is just boils down to a question of when does “volume–izing” the mortgage industry (be it in origination or servicing) cause policies and procedures to get tossed out of the window.

Well with GMAC Mortgage and JP Morgan now on the hot seat, that just leaves Bank of America, Wells Fargo (that now includes anything from Wachovia), Litton (a/k/a Goldman Sachs), Saxon (a/k/a Morgan Stanley), and all the little fellas (Carrington, American Home, HomEq, etc.) to get put on the rack. And in a politically charged year, the politicians should have a field day with this (unless, of course, they had a “Friend of __________ Loan”). We have already seen California Attorney General Jerry Brown, now running for “Governor Moon Beam – Part Deux,” chime in yesterday.

Monday, September 27, 2010

FLORIDA – THE PLACE TO LIVE (FREE) BUT NOT TO INVEST

Following the announcement by Ally Financial (f/k/a GMAC Mortgage) that it will stop foreclosure proceedings as they sort out their issue of filing improper affidavits, the Florida top court is being ‘asked’ to halt around 80 percent of all foreclosures in the Sunshine State. At issue are the practices of three law firms that have been operating as “foreclosure mills” for servicers. At risk are thousands of final judgments that could be reopened.


U.S. Rep. Alan Grayson (D-Fla.) has asked that the Florida Supreme Court halt foreclosures being handled by the law offices of David J. Stern, Marshall C. Watson, and Shapiro & Fishman. These three major law firms are currently under investigation by the Florida Attorney General over questions about slipshod paperwork practices involving thousands of cases.


The effect of this on securitizations, which could be tied up in court for years, is the possible waterfall impact if the foreclosures are reversed. If the foreclosure is deemed invalid, and the subsequent liquidation of the property following conversion to REO is voided, query whether the trust can seek to have the money previously paid out “clawed back” from investors –say by an off-set to future payments. And what about the write-downs and write offs of mezzanine and sub-bonds that took the Realized Loss upon liquidation.


Given that this is such a mess, it is unlikely that the Court’s will unwind all effected foreclosures. The size of the issue, given that a significant portfolio of loans in the subprime world came out of Florida, would be too dramatic on an already weak financial market. More likely, the Courts will punish the culprits. However, since the three law firms will not be able to withstand the legal liability if found guilty, servicers may also be dragged in for not properly managing the outsourced relationships. Legal liability could attached to the servicers under a negligence standard. Servicers could also be hit with a double whammy if any reversal of a foreclosure could require that the servicer mayd also have to return any reimbursement moneys out of the REO sale proceeds. That would clearly hit their bottom line hard.


Liability insurance providers, specifically E&O issuers for the servicers, as well as the malpractice insurance providers for the three law firms, better start reserving against this exposure, if they can. Exposure could be in the hundreds of millions, if not billions.


And all of this, from the State that gave us the great “chad” issue. I guess doing something properly is not in the nature of some Floridians. Must be all that sunshine.

Saturday, September 25, 2010

MORE CRACKS IN THE SYSTEM – ROBO-FORECLOSURES BY SERVICERS MEAN LESS $ TO INVESTORS

Moody’s, the now ever vigilant rating agency, has caught wind of the failure of servicers to properly follow legal procedures when foreclosing on properties. In an announcement this week, the rating agency has decided to review Ally Financial (f/k/a GMAC Mortgage) for downgrade following the servicer's acknowledgement that they may have not been properly preparing foreclosure documents.

In what is commonly referred to as “Robo-foreclosures,” Ally Financial appears to have been filing foreclosure affidavits in court that were not signed by persons with actual knowledge of the facts required for such paperwork. In addition, affidavits were not notarized in the presence of the notary. In its response, a spokesman for Ally was quoted in an article for HousingWire as saying that the substantive content of the foreclosure paperwork, such as loan balance, delinquency and note and mortgage information, did not appear to have been misstated or inaccurate and that Ally believes “that the substantive content of the affidavits in question were factually accurate.” Naturally, it is Ally’s interpretation of what is ‘accurate substantive content’ and what was just ‘procedural errors’ – like due process. And hey, that notary thing – really – it’s like the corporate seal – does anyone really think it’s important these days? And what is it now, a buck? I remember when it was $0.25!

In an attempt to rectify the situation, Ally has suspended evictions on foreclosures where a faulty affidavit was detected. Whether they are closing the barn door after the horse got out is pretty clear. More important is the impact this will have on the securitization structures. With approximately $380 billion under servicing management as of July 31, such a hick-up in foreclosures will mean less money coming back to investors as this mess is fixed. And with plaintiff attorneys more than happy to run cases like this into court and tie up liquidation of the REO property, it looks like everyone, other than the delinquent borrower who will be getting a continuing free ride due to Ally’s slip-up, will be taking it in the shorts. Even Ally, as first in line to receive reimbursements from liquidation proceeds, will have to now wait for their money as these foreclosures are cleaned up. Moody’s will be looking at any rating impact based, at least in part, on this new timeline for foreclosures and REO liquidations and its legal and financial impact to Ally. Should be interesting to see what Ally's policies and procedures said about this.

Maybe GMAC can get some additional TARP money to help out. They still have a few more days before TARP goes away.

Thursday, September 23, 2010

FANNIE PUSHING HOMEPATH REO’S SALES

In a press release issued today, Fannie Mae announced that it is incentivizing the market participants to buy their swelling portfolio of REO properties by the end of the year. Selling agents of REO properties purchased from FNMA’s HomePath will receive a $1,500 bonus per sale. This is over and above the 3.5% refund of the final sale price that the homebuyer receives. The push, however, is that the home purchase must be completed by the end of the year to be eligible for these incentives.

So, it looks like Fannie is FIFOing REO inventory. From previous announcements, Fannie has been pushing servicers recently to foreclosure on properties where the borrower occupant has not been working to either modify their loan or transfer title in a deed in lieu - in a July speech, Edward DeMarco, acting director of the Federal Housing Finance Agency, told loss mitigation servicers that, "if you have an abandoned property or a borrower not willing to discuss or work with anything, then get going [and foreclose]”. Now, in order to clean up the books before the end of the year, Fannie is looking to pay their sell brokers an extra vig to move product.

Back in February, Fannie began the 3.5% incentive to buyers of its HomePath properties. HomePath, Fannie’s in-house manager of its foreclosures, also allows for special financing, which could allow buyers to purchase these properties with 3% down.

So, this could spell a bit of a bubble in cash-flow to securitizations which hold the Fannie Mae REO assets. However, with the glut of REO inventory on every servicers books, and HomePath prices not being anything special, it is unclear whether a $1,500 kicker will really help move product. But then again, in this market, any little thing may help.

Wednesday, September 22, 2010

“SEND THEM TO SCHOOL” – TREASURY'S NEW PROGRAM FOR THE MORBIDLY DEBT LADEN AMERICANS

In his remarks today at the CFED Asset Learning Conference, Assistant Secretary for Financial Institutions Michael Barr announced the Treasury Department’s newest attempt at rectifying the past mistakes of the financial consumer. In conjunction with the Financial Literacy and Education Commission, the Treasury has drafted a concept of core financial competencies for individuals. This ‘baseline’ of knowledge appears to be a way that the Treasury believes will bring financial consumers to a better understanding of what they are getting into.

While knowledge and education are a lofty goal, there has to be some understanding of the ability (or inability) of the financial consumer to be receptive to the program. The mistake of the past was that while a consumer was able to qualify for a loosely underwritten mortgage loan did not mean that such consumer should have been a homeowner. Pressure from the then current administration on down to the consumer’s desire to own a home, together with all the intermediaries (mortgage broker, appraiser, home builder, realtor, Wall Street banker/lawyer, etc.) drove the market into the wall with one huge “SPLAT.” Now, the Treasury believes that showing the consumer what he needs to know will somehow avoid this problem in the future.

One flaw with this concept is the fact that Wall Street, specifically the sub-prime mortgage market for which we have to thank as a significant contributor to the current financial hole we are in, will never want an educated consumer. It is the theory of “Caveat Emptor” or "Let the buyer beware" that fueled the current crisis and allowed those in the game to make vast amounts of money. Feeding these consumers easy credit allowed all involved to run this vast financial machine. Educating the consumer will not bring profits. To show the consumer what was being done would be like showing a person what it actually takes to turn a cow into a hamburger. And how many people really want to know what was in their McLoan or how it was made. Most of these lower income financial consumers (the sub-prime borrower) want something that is easy to swallow, tastes good and is cheap. Unfortunately, they are now experiencing the indigestion that comes from consuming so much “Fast Finance.”

Yet, Mr. Barr believes that Treasury, with the establishment of the Consumer Financial Protection Bureau, can become the home economics trainer of the debt overweight consumer. By putting the unbanked and underbanked consumer (again, the sub-prime borrower) on a “dollar watchers diet” and educating them on how to fiscally shape-up, Mr. Barr stated that this will empower American families and create a level playing field for all providers of consumer financial products and services. “We need to empower consumers to make good choices for themselves and their families. We need to recognize that inertia is a powerful part of human decision. Anything that we can do to create an automated aspect to savings decisions has a lasting impact. How choices are framed and ordered can also have big impacts, which requires us to be intentional about the architecture of choice; defaults are ubiquitous and powerful, so choose the default wisely, and people view gain and loss differently, so an assurance of safety can be an attractive draw to save. These are just a few of the lessons that behavioral economics has taught us about human behavior. These and other lessons should be considered wisely to access and asset building efforts.”

But like a gym membership, it only has an effect on those people that commit to the program for a consistent period of time. However, the financial consumers discussed by Mr. Barr were not the type to educate themselves before entering into significant financial arrangements. They just wanted their McLoan - supersized. Now, they are looking for the magic pill (HAMP) to get them “debt thin” again. But like the promises of so many of those diet pills, loan modifications or debt settlements appear to only work for a limited few. So, while this new education program may work to help a few of the morbidly financial obese that commit to the program, it probably will be like the treadmill in the corner of the basement and will not get most of these borrowers off the couch and stop them from eating “credit Cheetos”, once the shelves are restocked.

Thursday, September 16, 2010

TARP – WE HATE TO SEE YOU GO

On September 16, the Congressional Oversight Panel (COP) released its “September Oversight Report Assessing the TARP on the Eve of Its Expiration.” In the report, much is made of public perception and “stigma” of the TARP programs following a failure to meet its lofty goals.

Initially established under the Emergency Economic Stabilization Act of 2008 (EESA) to provide up to $700 billion in financial commitments, TARP was designed to purchase toxic assets of financial institutions. But soon after its roll-out, the TARP checkbook was used to plug any leak, or potential leak, in the financial dike. Banks, even relatively healthy ones, were forced to eat TARP money. AIG got more than its share of TARP cash (that then went circuitously to Goldman Sachs) as did two of the domestic auto makers. Then, in December 2009, under the authority to extend TARP, the Treasury recommitted to focus on the three areas it was initially established for: (i) mortgage foreclosure relief; (ii) small business lending, including funding to small and community banks; and (iii) support for securitization markets through TALF, the Term Asset-Backed Securities Loan Facility. But time is running out for the government program that couldn’t, with a drop dead date of October 3, 2010.

One problem stated in the report is that the wolves guarding the hen-house, namely Treasury and other government agencies, have either failed to issue any meaningful empirical studies to support any analytical assessment of the program or are unable to quantify the effects of TARP because of so much “noise” in the data necessary to analyze its effect. COP noted that due to the nature of the various financial rescue programs implemented by different agencies that were designed to interact with each other, it is difficult to isolating the effects of TARP. Lastly, the large amounts of data needed to conduct the research of the impact of TARP was either not publicly available or not even collected by the Treasury, making any analysis difficult.

While the report cites the various economists that COP consulted with regard to its report, with as many different views as a group of rabbinical students discussing a single point in the Torah, of interest is the general consensus by these economists that while TARP was necessary to stabilize the financial system at its time of crisis, it was mismanaged in its execution. This mismanagement, together with ineffective communication of actions taken, raised public confusion and undermined public trust in the programs rolled out under TARP. In summing up its effectiveness, COP stated that “although the TARP provided critical government support when the financial system was in a severe crisis, its effectiveness at pursuing its broader statutory goals has been far more limited.” And anyone that watches the market knows, it is public perception that makes the Bulls Run and the Bears Attack.

Another point of contention in the report addresses the legacy that the program will leave after expiration, namely Treasury holding billions of private-company securities and the government’s guarantee of “to-big-to-fail” financial institutions, which the commission acknowledges that even after the provisions in the Dodd-Frank Act, will be difficult to unwind.

What will be interesting to see are the last minute, race to the finish line, programs that Treasury will pump out before TARP expires. Its enacting legislation, specifically section 106(e) of EESA, provides that Treasury can continue to fund its commitments after October 3, so long as those commitments were made prior to such date. Of all the programs instituted under TARP, the ever so questionably effective HAMP (Homeowners Assistance Modification Program) is the largest commitment. While certain aspects of HAMP will be limited following October 3, including cutting off any new servicers to HAMP, Treasury has indicated that it will be changing the purchase price calculation under HAMP from a fixed dollar amount to a formula. Expect that to be established before October 3. Other than re-giggering HAMP, the COP report states that while less than $5 billion has been disbursed on housing programs, Treasury has the ability to disburse up to $45.6 billion that are not intended to be recovered under HAMP or the other housing programs.

To conclude, while there will be a number of readings of the COP’s report, and the depth of the impact of TARP will be felt for years forward, the following are some of the more salient statements made by the Panel in the report:

• Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises.

• The fact that the government chose not to impose such stringent costs upon TARP recipients [putting distressed banks into liquidation or receivership] meant that the program’s moral hazard costs were much greater than necessary.

• Treasury did not monitor lending at the individual TARP recipient level, however, nor require CPP [Capital Purchase Program for Banks] recipients to report on their use of funds, so these results can not be independently verified.

• HAMP remains the cornerstone of Treasury’s foreclosure mitigation efforts. . . Unfortunately, despite Treasury’s efforts to collect meaningful data in this area, there remains important questions about why such a large number of trial modifications have failed to convert to permanent modifications.

• These differences [between the assistance given to the financial sector and the auto industry] have raised questions about whether the government inappropriately blurred the line between its role as a policy-maker and its role as an investor.

• Treasury therefore used the TARP’s extension more to extend the government’s implicit guarantee of the financial system than to address the specific economic problems that the Secretary cited as justification for the extension.

I guess, in the end, it will just be interesting to see where the players behind TARP in Washington end up after October (or November 2012). Let’s see, Goldman Sachs' inside man Henry Paulson is now at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, and his trusty side-kick, Neel Kashkari, is now at PIMCO.

Wednesday, September 15, 2010

FORECLOSURE DROPS HOUSE VALUE GREATEST

In a soon to be released research publication by economists from MIT and Harvard, foreclosures appear to have the greatest negative impact on the value of a home, as compared to other forced sales. The article, entitled “Forced Sales and House Prices” is to be published in the American Economic Review and was written by MIT researcher Parag Pathak and Harvard researchers John Cambell and Stefano Giglio.

Based on data of 1.8 million home sales in Massachusetts from 1987 to 2009, the research found that the value of a home dropped by 27 percent when sold in foreclosure, as compared to 5 to 7 percent when sold due to death of the owner and 3 percent when sold due to bankruptcy of the owner. In addition, the research found that sellers of non-distressed occupied properties took a hit in their price if sold in a neighborhood that had a foreclosed home on the market. It was found that the value of a home dropped by 1 percent, on average, if it was within approximately 250 feet of a foreclosed home. And I would assume that in certain areas, like Detroit, the “blight” factor increases that percentage significantly.

So, what does this mean to the securitization investor. That once again, foreclosure is not in the best interest of the investor. Not only is the investor put in the back of the line for cash on the liquidation of the loan, with the trustee and servicer placed ahead of the investor for reimbursement of fees, expenses and advances, but the amount to be collected will be significantly discounted. Therefore, a modification would serve the investor better. However, the servicer does not have the economic interest in having the modification work. Based upon the rate of re-default, cost of modification, necessity to advance and the servicers general inability to act as a mortgage underwriter, servicers would rather hand over the loan to a foreclosure attorney for a fast turn of the underlying property.

More proof that the investor is the once taking the hit. And they don’t even know it.

Tuesday, September 14, 2010

THE BOND INSURERS WEIGH IN ON REPURCHASES

From a September 13 Bloomberg article by Hugh Son, it appears that the Association of Financial Guaranty Insurers (made up of Ambac, Assured Guaranty and several of the other large insurers) fired a letter off to Bank of America’s Chief Executive Officer Brian T. Moynihan claiming that more than half of the soured home-equity credit lines and residential mortgages created from 2005 through 2007 that insurers examined should be bought back.

Clearly, the insurers feel that they should not be on the hook for these problem mortgages and the payments they have made or will have to make for the failure of the underlying MBS securities which they insured. And even more clearly is their attempt to jump on the bandwagon of “who’s to blame and who is to pay.”

With most of the mortgage companies gone (can’t really go after Ameriquest, New Century, Fremont, etc. . . .etc. . .etc), the only guy in the room with some cash is BofA, having to pay for their stepping into Angelo Mozilo’s shoes at Countrywide. What is interesting is that the repurchase number being thrown around is between $10 and $20 billion, which is only about 2.5% to 5% of Countrywide’s reported production of $400 billion for 2007. It appears that somewhere the numbers don’t seem right.

As was noted in the article, the battle for repurchases is tedious, with the legal fights having to be done literally hand-to-hand (loan by loan basis). To “back of the envelope this, on a $20 billion portfolio of repurchase loans with an average loan balance of say $200,000, we are talking about 100,000 loans. In court, the party demanding repurchase has to show why a specific loan has to be repurchased. It’s not that the loan is in default, but rather that the loan violated a specific representation or warranty set forth in the pooling and servicing agreement, usually at the time of origination of the loan. And each of the 100,000 loans has to be individually shown by the party requesting repurchase to have breached a specific representation. I have seen this in practice at Fremont. It’s as if the repurchase requesting party is trying to storm a castle, one arrow at a time. All BofA has to do is stand at the wall and wait for this war of attrition to fade away.

Generally, there were more than 50 representations and warranties relating to the mortgage loans in the pooling and servicing agreements, of which maybe a dozen or so could be substantive to a repurchase request. Therefore, the man-hours needed to develop the repurchase request for 100,000 loans would be difficult, at best. And who pays for the cost of developing the repurchase request? The pooling and servicing agreements generally provide for servicer and trustee reimbursement of costs, but it is unclear if other third parties would have an ability to recoup costs. That makes enforcement of repurchases somewhat challenging.

So, with BofA being one of the only players left, why not pile it on. “Buck Buck Number 9 coming in”

The Bloomberg article can be seen at http://www.bloomberg.com/news/2010-09-13/bofa-may-owe-20-billion-in-mortgage-buybacks-insurers-say.html.

Tuesday, September 7, 2010

FHA “QUICKY” REFINANCE PROGRAM STARTS TODAY

September 7, the day after Labor Day this year, and the mortgage market returns from a weekend of hotdogs and back-yard football games to a new “let’s hope this works” program of the FHA.

Back in August, HUD secretary Shaun Donovan talked about the launch of a new "FHA Short Refinance" program. Initially unveiled to the public on August 3 while speaking at the National Association of Real Estate Brokers Conference in Fort Worth, Texas, the plan outlined would provide a new form of refinancing option to underwater homeowners. Eligibility for the new loan would require that the homeowner (i) be underwater but still current on the mortgage and (ii) have a credit score of 500 or better. In addition, once refinanced and insured by the FHA, the new refinanced first lien loan must have a loan-to-value ratio of no more than 97.75% and the borrower’s combined loan-to-value ratio be no more than 115%. Since the new FHA mortgage can only be used to refinance the unpaid principal balance on the first lien, any second lien has to be written down to meet the CLTV requirement.

The biggest hurdle to the program, however, appears to be the requirement that the existing first-lien holder (the securitization trust in most cases) must agree to write down at least 10% of the unpaid principal balance, and it must bring the borrower's combined loan-to-value ratio on that first mortgage to no more than 115%. Servicers will have to look at the “imminent default” provision of the Pooling and Servicing Agreements to allow them to “write down” this principal without fear of investor litigation.

Questions abound as to the practicality of this program. How a borrower that is current, as required by the program, could be deemed to be in imminent default? Since the CLTV requirement is 115%, isn’t it possible that there may be situations that the first lien holder would have to take the 10% write down while the second would not be impacted? What is the value to be used for the LTV and CLTV calculations? Would the new appraisal/value also have to capture any advances that were previously made by the servicer on the loan in order to keep the calculation in balance? How is this write-down deemed allowable in the securitization structure, since it is not technically a “write-down” of the balance of the current loan, but rather a substitution of a new loan with an LTV of 97.75% and probably different terms? Don’t the Pooling and Servicing Agreements limit subsititutions?

The Treasury Department has committed $14 billion in TARP funds for this program. Together with the FHA insurance, these new refinanced loans will have a government guarantee for up to 97.75% of the new home value. It appears at this point, however, that this “quicky” program only applied to non-GSE loans, probably based upon some circular nature if it had. So, not only can the first lien loan to be refinanced not be an FHA loan, it appears that the Treasury has not cleared the GSEs to write-down underwater loans.

According to HUD, it appears that the TARP funds are a way for the servicers of these non-GSE securitization products to support write-downs and write-offs of mortgages and to provide coverage for a share of potential losses on these new loans. Therefore, this program is really a way that the government means to incentivize the servicers to make these refinancings.

So, it looks like we have another “Quick Snap Hail Mary” pass from the quarterbacks in Washington. And while this one looks like it will end up thrown out of bounds, with no receivers in site, it appears that the only “short(s)” in this refinance program are the ones the investors are going to take it in . . .

Thursday, September 2, 2010

THE PLAY ON ALT-A SECURITIZATIONS – LET THE GAMES BEGIN (AGAIN)

In an article today in the Wall Street Journal by Prabha Natarajan, it looks like there is a renewed interest and demand for previously issued Alt-A securitization paper. While unclear, it appears these non-agency bonds include the sub-prime variety (there is some distinction between Alt-A and true sub-prime, which appears to have been lost in the recent financial hurricane).

As reported, in was stated by Jesse Litbvak, head of non-agency trading and Jefferies & Co in Stanford, CT (an MBS trading powerhouse?) that these trades are occurring because investors believe that the credit risk of continuing defaults are already priced into the bonds. That, together with the prospect of early redemption, as noted in the article by Matt Toms, head of U.S. public fixed income investment at ING Investment Management, means that the bonds have up-side potential.

Well, as we have seen from our recent past, that is anything but a sure thing. Of significance to this analysis of the value of the bonds is the redemption of the bonds before their maturity date. Currently, due to the refinance boom (or really, bubble), the bonds can be redeemed at their face value due to the early payment of the underlying mortgages. Where in the past, early redemption was something to be avoided (when the investor was paying 105 for the bond), now at the discount of 60-80, a redemption at face would be a good thing. And since in most securitizations, early payments are covered in the cash flow waterfall as a payment to the most senior bonds first, the AAA stand in line to get theirs before the rest.

Right now, with interest rates at historic lows, there has been an increasing portfolio of mortgages being paid off in the refinance market. However, this is still just a limited and decreasing pool of applicants. Beyond the fact that there are only a decreasing percentage of homeowners that will qualify for a refinancing over time, there is also the issue of whether the underlying mortgages are still tied to those ugly prepayment penalties that were the rage in the latter part of the Alt-A and sub-prime boom. And the only way to know that fact is to have loan level detail of the pool. So, while redemptions may be occurring today, do not expect this trend to continue strongly into the future.

The article discusses the fact that the play now is on the AAA bonds off the securitizations – yes those same AAA bonds that now everyone is questioning how the rating agencies reached that rating. More problematic will be the coming tsunami of realized losses on the securitization pools due to short sales and foreclosures that are then liquidated. With the failure of HAMP, HAFA, HALA and all the other programs to stem the tide, foreclosure still seems to be the outcome for a significant number of borrowers. Even Fannie is starting to put pressure on servicers to quicken the pace of foreclosures, as discussed in an article today entitled “Excessively Delaying Fannie Mae Foreclosures Will Now Cost Servicers” by Jacob Gaffney in HousingWire. And once the property is thereafter sold (at a loss to the unpaid principal balance of the loan plus costs and reimbursed advances), these “Realized Losses”, as defined in the securitization trust agreements, could press the losses beyond the mezzanine tranches and into the AAA bonds.

So, while the yields on these bonds may be double that of corporate paper and triple that of Treasurys, it looks like Wall Street is selling investors on stepping up to the tables and laying down money to roll the dice again. Let’s hope we don’t crap out (again).

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