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Residential Mortgage-Backed Securities Are Heading Over a Cliff

advisorperspectives.com | July 21, 2014

By Keith Jurow

Non-Agency residential mortgage-backed securities (RMBS) are securitized mortgages that are not guaranteed by Fannie Mae or Freddie Mac or insured by the FHA.

These non-guaranteed RMBS existed prior to the bubble years of 2005 – 2007, but the outstanding amount was relatively small. By early 2004, however, that number had climbed rapidly to $644 billion.

Then the speculative mania began to really heat up. Subprime lenders enlisted an army of 50,000 mortgage brokerage firms to hawk loans to just about anyone who was breathing and could sign their name.

With Wall Street frantically securitizing these loans and the three large rating Agencies giving their stamp-of-approval with what later turned out to be highly-questionable AAA ratings, underwriting standards had completely disappeared by mid-2006.

By the end of 2006, speculation reached unheard of proportions and underwriting standards had totally collapsed. Mortgages for $500,000 or more with no down payment were commonplace. Borrowers could get mortgages even when their total debt-to-income (DTI) ratio exceeded 50%. I have written about speculators who were able to buy ten homes or more with little to no down payment on any of them. Nearly the entire nation had become caught up in a frenzy that could only end in disaster.

As major housing markets headed over a cliff, the total amount of outstanding sub-prime, Alt A and other zany mortgages soared into the stratosphere. When mortgage lending finally peaked in July 2007, an incredible $2.3 trillion of non-guaranteed RMBS were outstanding. At the time, no one could really tell what a catastrophe had been created.

Mortgage Modifications

Even before the bankruptcy of Lehman Brothers in 2008, homeowners with non-guaranteed mortgages started defaulting in increasing numbers. Servicers responded by modifying mortgage terms to slow down the avalanche of defaults.

Amherst Securities Group (ASG) was the leading firm supplying comprehensive data on the mortgage market. Its spring 2010 report on The State of the US Residential Mortgage Market provided an excellent look at how bad the situation had gotten by the end of 2009.

Using Loan Performance’s enormous database on non-Agency securitized mortgages, ASG reported that roughly 613,000 of these mortgages had already been modified by the end of 2009. That was 11% of all the outstanding non-Agency mortgages. Hopes were high that modifications might stop the bleeding.

Unfortunately, borrowers didn’t cooperate. They began to re-default on their modified mortgages in huge numbers. ASG reported that by the end of 2009, 61% of borrowers with modified mortgages had re-defaulted within 12 months. What was worse, a third of them had defaulted within 90 days of the modification.

The rate of default for non-Agency mortgages was directly related to how severely the property was underwater. The more underwater properties had become, the higher were the rates of default.

For example, ASG reported that for loans originated in 2006, the annualized default rate for properties with a combined loan-to-value (LTV) ratio of 80% was only 4.7% at the end of 2009. The default rate jumped to 10% when the LTV was 110 - 120% and these homes had gone underwater. With properties severely underwater and the LTV at a sky-high 150 – 180%, default rates soared to 22%.

Regretfully, the rating agencies failed to see this connection until years after the collapse began.

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Back to July 2014 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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