Bend Over: How we are being screwed by banking lobbyists

[implacable44]

Poor risk management driven by old fashioned greed. The Risk models were built with assumptions - one of those major assumptions was appreciation. Another assumption was average time person x lives in a house (or rate of refinances by the average person) This is a sales driven industry - so with the boom the beast was built and the beast had to be fed through different channels and pricing structures.

retail - or direct sales - these loans are made directly from bank a to the customer and priced accordingly -- generally 1 point up front with buy down options ( depending on the various programs - Pre-payment penalty terms / ARMS / I-O loans -- 40 year terms - balloons).

Wholesale - Broker loans - These loans are bought at a premium -- sourced from broker a to customer and then sold to bank b at a premium - again points - mostly loaded in the back of the loan and not "known" to the average customer,

Correspondent - a whole nother issue here -- the secondary market is an issue that caused major headaches - loans are bought and sold in bulk at a discount with a premium to the selling lender all the time and the saving grace in both wholesale and correspondent deals had always been repurchase agreements. Well.... you can't execute the repurchase agreement when the guy you bought the loan from is either out of business or bankrupt --- so the lack of due diligence in establishing relationships was another problem...

Most lenders are leaning towards agency lending -- meaning they will originate / purchase the loan with full intent to sell it to Fannie or Freddie (where before they securitized them and sold them on the market to silly investors) -- so that you and I - the tax payer will back them. Most companies underwrite according to a DU engine or specifically to FHA / VA guidelines.

Which brings us to Modifications -- as Lakaluva spoke of ... now most mods are forbearance to mods... but there are also straight modifications where the right thing is actually done - there are rate reductioins, principal write downs, waived interest charges, etc... (before the big thing in the loss mitigation / collection world was to just "extend" the mortgage to "cure" delinquency and project a false default rate for obvious reasons).

Trust me when I tell you -- nobody knows how bad this mess actually is.

[RandomGuy]

The actual default rate is nowhere near that high; it's actually well below 10%, as I understand it.

...trying to piece together a conversation I had with an economics professor friend of mine at a (very social) Chinese New Year Party.

The problem, as he explained it, is the amount the banks/mortgage holders were leveraged allowed for little to no defaults on the mortgages before the banks themselves were in default. They left themselves no breathing room.

Nationally, yes the default rate is about that.

But within some of the bundled securities, the default rates of some of the groups of loans does get into the 50+% range.

The leveraging goes back to the final bottom line "surplus".

What is left over after ALL liabilities are subracted from all assets, and is the bottom line measure of financial health for banks (as well as insurance companies) .

Example:

Assets= 100 dollars
Liabilities =90 dollars
Surplus= 100-90= 10 dollars

If your assets are loans, and the portfolio of those loans declines 11%, you are left with

Assets= 89 dollars
Liabilities =90 dollars
Surplus= 89-90= -1 dollars

This makes you insolvent even though your assets only declined by 11%.

The problem with this is that you can't really make new loans to improve your financial position if you ending surplus is negative.

I am more familiar with insurance companies, but to my understanding many of the same rules apply to banks, and they work in generally similar ways.

[RandomGuy]

Do you have info on this?

I've been given to understand the broker-dealers are the bigger culprit here. They were excepted from capital requirements by the SEC sometime in the last five years or so.

Capital rules for banks is much stricter, I think. I don't think leverage is as much the issue for them. What's happening is forced liquidation of assets at huge losses to meet the capital restrictions. But they can't afford to write down all the losses, and they're overvaluing the unmarketable assets still on their books, so the fix they're in is much worse than it appears.

Here's the thing about leverage:

Go back to our hypothetical bank.

Assets = 100 dollars
Liabilities = 90 dollars
Surplus = 10 dollars

Now, you want to grow your bank, so you decide to borrow money, say 50 dollars, and use that 50 bucks to buy new assets. For a bank those assets are loans, or in this case CDOs or MBSs.

Assets = 150 dollars
Liabilities = 140 dollars
Surplus = 10 dollars.

Your ending surplus is exactly the same, but you are now heavily leveraged. If the value of those assets remains stable, you have probably increased your net income by around 40 to 50% as well, making your shareholders very happy, and earning yourself a nice fat bonus.

What happens when the value of your assets declines by that same 11%?

Assets = 133.5
Liabilities = 140
Surplus = 133.5 - 140 = -6.5 dollars

Your bottom line measure of insolvency has gone from - 1 dollar, to -6.5 dollars.

In fact, if one does the math it only takes a 6.67% decline in asset value to make you insolvent. (10/150)

I hope this helps.

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Begin edit

As ChumpDumper rightly pointed out:

That bank CEO still gets the fat bonus even when his company is underwater. I want to be an overpaid CEO too. It is my life goal, because I know if I can sucker some BOD into making me a CEO I can coast for the rest of my life. (drools)

[RandomGuy]

http://www.bellsbeer.com/index.php/brands.html

The sample I had had a mixture of the first five. Good stuff, especially the Two-Hearted (an IPA)

...searching.

Brother Thelonious abbey style ale.

http://www.northcoastbrewing.com/bee...Thelonious.htm

I drool just thinking about this stuff.

[ChumpDumper]

Here's the thing about leverage:

Go back to our hypothetical bank.

Assets = 100 dollars
Liabilities = 90 dollars
Surplus = 10 dollars

Now, you want to grow your bank, so you decide to borrow money, say 50 dollars, and use that 50 bucks to buy new assets. For a bank those assets are loans, or in this case CDOs or MBSs.

Assets = 150 dollars
Liabilities = 140 dollars
Surplus = 10 dollars.

Your ending surplus is exactly the same, but you are now heavily leveraged. If the value of those assets remains stable, you have probably increased your net income by around 40 to 50% as well, making your shareholders very happy, and earning yourself a nice fat bonus.

What happens when the value of your assets declines by that same 11%?

Assets = 133.5
Liabilities = 140
Surplus = 133.5 - 140 = -6.5 dollars

Your bottom line measure of insolvency has gone from - 1 dollar, to -6.5 dollars.

In fact, if one does the math it only takes a 6.67% decline in asset value to make you insolvent. (10/150)

You still get a fat bonus though.

[101A]

Brother Thelonious abbey style ale.

http://www.northcoastbrewing.com/bee...Thelonious.htm

I drool just thinking about this stuff.

See how you are.

That's a left coast beer, and here I am in Pa...oh well, plenty of microbrews here, but now I've got to have some of that.


Oh well, I'll just open a Pale Ale and put 'Round Midnight on - it'll have to do.

[RandomGuy]

See how you are.

That's a left coast beer, and here I am in Pa...oh well, plenty of microbrews here, but now I've got to have some of that.


Oh well, I'll just open a Pale Ale and put 'Round Midnight on - it'll have to do.

mmm that means you get to have the Yeungling beers. Lucky bas .

Central texas has it's share of good local beers too, but I have been trying to get my local brew store to get some Yeungling brews for a while.

[Winehole23]

Central texas has it's share of good local beers too, but I have been trying to get my local brew store to get some Yeungling brews for a while.

http://www.realalebrewing.com/beer_styles.php

http://www.liveoakbrewing.com/beer/



Real Ale Fireman's 4












http://texasbeer.blogspot.com/2008/09/texas-brewpub-report.html


http://www.saintarnold.com/beers/


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[LnGrrrR]

So.. given all of the above... does this mean I might actually be able to afford a house at a decent price in 3 years?

Does it also mean I'll be paying for it in yen or some other currency? lol

[RandomGuy]

So.. given all of the above... does this mean I might actually be able to afford a house at a decent price in 3 years?

Does it also mean I'll be paying for it in yen or some other currency? lol

3 years? Most certainly.