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jliberto
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Joined: 09 Jan 2008
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Location: urbana, maryland

mortgage lenders reporting losses
PostPosted: Wed Jan 09, 2008 5:49 am Reply with quoteBack to top

I am not one to usually post issues on forums but I think this is of some interest. With lenders and banks posting record losses and the media jumping to exploit the negatives, something is lost.....

When these banks/lenders have a forclosure or buyback they post it on their books as a loss. The reality is that these banks/lenders are not in a total loss. Their balance sheets now have a asset. Once they sell the properties/assets their loss is not as originally reported.

The entire frenzy is competely overstated. Not that these banks/lenders will have some loss but its not a total loss. The real loss is not realized until the assets are sold. From an accounting standpoint banks report a loss when their loan becomes default. This causes economic scare and creates fear for consumers. Its a shame that things get so twisted and hurt the economy. Rates are good and if not for the media the economy would be better
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kden12
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Joined: 20 Nov 2007
Posts: 532

Re: mortgage lenders reporting losses
PostPosted: Wed Jan 09, 2008 6:00 am Reply with quoteBack to top

The beginning was with the initialization of the subprime default rates increasing. The bond/investment "rating" companies immediately downgraded all of these types of SIV investments sending the market into a tail spin. The media should take some of the blame for inflating it to be reported as often as Britney Spears.. it is ridicilious. The worse they make it look the better the ratings for the network and the worse the market agreed.
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angryvoodoo
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Joined: 20 Nov 2007
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Re: mortgage lenders reporting losses
PostPosted: Wed Jan 09, 2008 1:03 pm Reply with quoteBack to top

jliberto wrote:
I am not one to usually post issues on forums but I think this is of some interest. With lenders and banks posting record losses and the media jumping to exploit the negatives, something is lost.....

When these banks/lenders have a forclosure or buyback they post it on their books as a loss. The reality is that these banks/lenders are not in a total loss. Their balance sheets now have a asset. Once they sell the properties/assets their loss is not as originally reported.

The entire frenzy is competely overstated. Not that these banks/lenders will have some loss but its not a total loss. The real loss is not realized until the assets are sold. From an accounting standpoint banks report a loss when their loan becomes default. This causes economic scare and creates fear for consumers. Its a shame that things get so twisted and hurt the economy. Rates are good and if not for the media the economy would be better


how long will REO remain as asset, when there is a cash crunch?
does no good as the threat looms of international investors banging on the door to redeem fraudulently sold investments at face value when the market value is cents on the dollar. The case is insolvency. That has been blogged for months, if the media is picking up on it thats a GOOD thing because it is the truth, has been the truth, and is a real concern

If they have to report partial or whole truths to a lenders detriment, its because it is unavoidable.

the truth is out there, just take ur hands down from in front of ur face.

PEACE!

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billddrummer
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Joined: 06 Aug 2007
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Location: Reno, NV

Re: mortgage lenders reporting losses
PostPosted: Thu Jan 10, 2008 12:30 am Reply with quoteBack to top

jliberto wrote:
I am not one to usually post issues on forums but I think this is of some interest. With lenders and banks posting record losses and the media jumping to exploit the negatives, something is lost.....

When these banks/lenders have a forclosure or buyback they post it on their books as a loss. The reality is that these banks/lenders are not in a total loss. Their balance sheets now have a asset. Once they sell the properties/assets their loss is not as originally reported.

The entire frenzy is competely overstated. Not that these banks/lenders will have some loss but its not a total loss. The real loss is not realized until the assets are sold. From an accounting standpoint banks report a loss when their loan becomes default. This causes economic scare and creates fear for consumers. Its a shame that things get so twisted and hurt the economy. Rates are good and if not for the media the economy would be better


I disagree with your assessment of the accounting treatment, and your assertion that REOs don't represent real losses.

When a bank takes a property back on its books to replace a loan (earning asset), the property becomes a cost. The bank then has to make tax payments, pay HOA dues, and possibly sink money into maintenance costs that would have been borne by the borrower. The loan that was replaced is no longer earning interest--and if the loan was sold, the premium the bank booked on the sale has to be reversed.

Properties aren't earning assets. Loans are earning assets. If a property is sold from the bank's portfolio for less than the underlying loan, the bank books a loss on the difference.

So, REOs that sit on bank balance sheets produce losses until they're sold. The bank loses the interest it would have earned on the loan, has to pay for items related to the property that it wasn't originally planning on, and more than likely will take an additional loss when the property finally sells.

I've been a commercial loan and underwritng analyst for nearly 25 years, and I've looked at thousands of financial packages over my career. Whether you think that makes my analysis credible is irrelevant to me. I just wanted the forum to know that I'm not talking out of my ass.

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buyerbeware
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Joined: 08 Aug 2007
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Re: mortgage lenders reporting losses
PostPosted: Thu Jan 10, 2008 4:11 am Reply with quoteBack to top

^what he said^

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sa
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Location: San Jose, CA

Re: mortgage lenders reporting losses
PostPosted: Fri Jan 18, 2008 5:34 am Reply with quoteBack to top

Billdrummer, when the lender takes a property back, do they book it at the current market value? How do they determine the value at that point in time? Thanks for sharing your expertise.

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sless
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Joined: 19 Dec 2007
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Re: mortgage lenders reporting losses
PostPosted: Fri Jan 18, 2008 9:38 am Reply with quoteBack to top

Quote:
I am not one to usually post issues on forums but I think this is of some interest. With lenders and banks posting record losses and the media jumping to exploit the negatives, something is lost.....

When these banks/lenders have a forclosure or buyback they post it on their books as a loss. The reality is that these banks/lenders are not in a total loss. Their balance sheets now have a asset. Once they sell the properties/assets their loss is not as originally reported.

The entire frenzy is competely overstated. Not that these banks/lenders will have some loss but its not a total loss. The real loss is not realized until the assets are sold. From an accounting standpoint banks report a loss when their loan becomes default. This causes economic scare and creates fear for consumers. Its a shame that things get so twisted and hurt the economy. Rates are good and if not for the media the economy would be better



I think i see your mistake, REO and losses in the financial sector can fall under two separate issues.

Each loss in the financial sector is unique in it own way.. For example, It could be argued Leveraged Super Senior conduits are, in fact, the main reason Citi has any exposure to write downs. Or more specifically, the nature of the debt pool of a CDO is one in which forces the originator to obligate, or underwrite some of the risk associated with any loss.. "super senior trench" These usually were sold to Monoline insurance companies to which a small spread was afforded to them " attachment points that significantly exceed a level of losses consistent with a AAA rating.", to which the only collateral they had to give in exchange was a Credit Default Swap. These Trenches are established "High and Wide", with options with triggers for liquidation in place to help ensure no real loss would happen to the Monoline insurer. "In Citi the liquidation trigger was attached to the credit rating of the underlining asset pool."

What Citi did was leveraged these by throwing them into a Investment conduit and issued commercial paper against it, getting higher yields. To entice investors for the commercial paper, since there is a high liquidity risk associated with them, Citi offered to investors liquidity backstops: promising to buy up LSS commercial paper if buyers for it couldn’t be found.

The problem was this…. Equity trenches were mispriced, a drop in value put a strain on the Super Senior trenches, which had commercial paper issued against them, and since there was no buyers the Liquidity Put was enacted and Citi was forced to buy them back. The problem is that the price they paid for them when they dissolved their SIV and the actual value of the Commercial Paper is dis-paired; since the ABCP issued by LSS conduits were based on underlying equity of only 1/10 the amount of the ABCP. When CDO super-senior tranches turned out not to be of AAA quality, the leveraging of the CDOs multiplied the consequences.

For example, if there a 5% drop in the value of the unfunded underlying super senior tranche, there will be a 50% drop in the market value of the funded investment"

Or better put.

"In a mark-to-market world, however, lack of principal loss is not a defensible basis for valuing the instrument at par. As defaults mount, the probability of taking losses — i.e., of the investment not being money good — increases. Much more importantly, however, from a fair value perspective the price at which the investor can sell the position will decline. As more defaults occur, the rate of that price decline increases. Negative convexity begins to exert itself.
In addition, being at the top of the capital structure in a securitization means being short correlation. That is, as defaults become more correlated, the probability of default losses eating through the subordinate tranches increases. What happens when default losses increase not only in frequency and severity, but also in increasingly correlated fashion. The negative convexity compounds. Small increases in defaults lead to ever larger declines in valuation. To the degree that large balance sheet positions embed concentrated exposures to correlation, default probabilities, and a particularly difficult to capture interaction term between these two risk factors, the economic exposure rapidly becomes enormous."


In addition, the concentrated positions had in part emerged as a result of very specific governance policies intended to minimize other risks. For many years, it has been well understood that, with securitizations, it is possible for the structuring institution to sell almost all of the bonds yet retain much of the risk. During earlier periods of mortgage market stress, a number of structuring institutions were left with residuals and other equity tranches, resulting in large losses when defaults rose and liquidity ebbed. As a result, most financial institutions instituted strict limit structures intended to force the sale of these risky tranches. That's precisely what occurred with the subprime securitizations. But to make the riskiest tranches attractive to purchasers, these were priced attractively relative to expected cash flows. And since the overall cash flow from the underlying assets is invariant to the capital structure, the cost for skewing its distribution toward the lower tranches was that higher tranches such as super seniors that would be relatively overpriced and, thus, more difficult to sell. So governance mechanisms intended to limit one type of risk effectively led to others risks being assumed that were more complex and difficult to analyze.
If a firm were to have a concentrated position in a risk that suddenly became illiquid, that would clearly be bad. However, much worse would be a concentrated position with negative convexity that suddenly became illiquid. That trifecta is a risk manager's nightmare, as there is little to do once the markets start moving adversely and liquidity goes away, other than to hope. And as one head trader wisely said recently, "Hope is a crappy hedge." Combine this unhappy situation with risk that has begun to morph into less obvious forms and one starts to understand what occurred with super senior ABS CDO over the past nine months."

Pasted from <http://www.sec.gov/news/speech/2007/spch112807ers.htm>


There losses has a lose connection to subprime, since a CDO is a derative of numerous Asset Backed Pools, which contained subprime mortgages, but it is not the same as say Washington Mutuals.
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billddrummer
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Joined: 06 Aug 2007
Posts: 792
Location: Reno, NV

Re: mortgage lenders reporting losses
PostPosted: Fri Jan 18, 2008 4:36 pm Reply with quoteBack to top

sa wrote:
Billdrummer, when the lender takes a property back, do they book it at the current market value? How do they determine the value at that point in time? Thanks for sharing your expertise.


Before I answer, I'm impressed at the poster who found that explanation of why the losses are multiplied. It's a lot of reading, but the simple answer is because the derivative securities were leveraged with commercial paper, and when the values of the derivatives dropped, there was insufficient collateral to roll over the commercial paper.

However, several times during that post he mentions "trenches." The term is "tranches," from French meaning "slices." If you want to impress us, get the words right!

But I digress. Usually a bank will engage an appraiser to determine a value (in Nevada it's called a BVE--Brokers Value Estimate). That's the starting point for offers (whether with a short sale or a bid at the auction). After the auction takes place, if no qualified bidders emerge, that value becomes the amount the bank uses on its balance sheet.

Carrying costs for the property are usually added to that value as they are incurred. For example, if a tax payment is made, the bank will cut a check to the county and increase the value shown on the balance sheet. Now, that doesn't mean the property itself is appreciating--all the bank wants to do is to isolate all the costs associated with that property in one place. When the property (finally) sells, the bank removes the property from its balance sheet, compares the sale price to the value plus costs, and books either a gain or a loss, depending on the transaction.

These days, they'll be booking losses.

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Hackney71
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Re: mortgage lenders reporting losses
PostPosted: Fri Jan 18, 2008 5:34 pm Reply with quoteBack to top

sa wrote:
...when the lender takes a property back, do they book it at the current market value? How do they determine the value at that point in time?


In the bank I work for, if it is a portfolio loan... We "write down" the value from the original appraisal 20%... We then order a BPO (broker price opinion=costs about $160 bucks) to determine current value as it sits. We then have marketing and cleanup costs and the realtor fees. We then have issues with what state the asset is in and what their redemption periods are... We lose foregone interest. Then we start "marking down" the sales price as Days on the Market get over maybe between 90-180 days...

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billddrummer
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Re: mortgage lenders reporting losses
PostPosted: Fri Jan 18, 2008 6:37 pm Reply with quoteBack to top

Hackney71 wrote:
sa wrote:
...when the lender takes a property back, do they book it at the current market value? How do they determine the value at that point in time?


In the bank I work for, if it is a portfolio loan... We "write down" the value from the original appraisal 20%... We then order a BPO (broker price opinion=costs about $160 bucks) to determine current value as it sits. We then have marketing and cleanup costs and the realtor fees. We then have issues with what state the asset is in and what their redemption periods are... We lose foregone interest. Then we start "marking down" the sales price as Days on the Market get over maybe between 90-180 days...


How do your BPOs compare with market?

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