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Banks May Win Capital Rule Easing in EU's ABS Market Push


bloomberg.com | February 18, 2015

By Jim Brunsden

Real estate investment euphoria is widespread. An asset class for which Wall Street has provided little useful information – residential mortgage-backed securities (RMBS) – is especially vulnerable if this euphoria is misplaced.

Let’s look at the history of the RMBS market and the fundamentals behind these securities today.

The desperate search for yield

As I have discussed in numerous articles (see here, for example), high-net-worth investors as well as institutions have been in a desperate search for yield. The Federal Reserve has driven down interest rates to levels that have made it impossible to obtain acceptable rates of return for traditional fixed income investments.

Because of the Fed’s QE policy, investors are compelled to purchase riskier investments hoping that they will provide higher rates of return. Many have plunged into RMBS.

Non-agency mortgage-backed securities

Non-agency RMBS are securitized mortgages that are not guaranteed by Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) or Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) or insured by the FHA. By early 2004, the outstanding amount of non-guaranteed RMBS had more than doubled over the previous four years to $644 billion. Then the speculative mania moved into high gear. Subprime lenders were fed increasingly riskier loan applications by 50,000 mortgage brokers who recruited nearly any borrower who could sign his/her name.

With Wall Street frantically securitizing these loans and the three large rating agencies (Moody’s, S&P and Fitch) giving what later turned out to be highly questionable AAA ratings, underwriting standards deteriorated rapidly by mid-2006.

By the end of 2006, speculation reached incredible proportions and underwriting standards had completely collapsed. Half-million dollar mortgages with no down payment were commonplace. Most borrowers could get loans even when their total debt-to-income (DTI) ratio exceeded 50% as long as they had not defaulted in the previous two years.

From coast to coast, speculation had become the order of the day. Yet few analysts even hinted that this was certain to end in disaster.

As the housing insanity headed straight over a cliff, the total amount of outstanding subprime and other unconventional mortgages soared. When mortgage lending finally peaked in July 2007, an incredible $2.31 trillion of non-guaranteed RMBS were outstanding.

No one really knew the extent of the mess that was created.

Mortgage modifications designed to stop the bleeding

Before Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) went bankrupt, a growing number of homeowners with non-guaranteed mortgages had already started defaulting. As 2008 unfolded, mortgage servicers were compelled to modify large numbers of mortgages to slow down this avalanche of defaults.

Hopes ran high that these modifications might slow the bleeding. Unfortunately, these hopes were dashed. Borrowers began defaulting on their modified mortgages in huge numbers. Amherst Securities Group (ASG) was the leading firm supplying comprehensive data on the mortgage market. They reported that by the end of 2009, 61% of borrowers with modified mortgages had re-defaulted within 12 months of receiving their modification.

A January 16 email report issued by the highly respected Inside Mortgage Finance stated that sub-prime loan modifications now totaled 62% of the loan balance of all outstanding sub-prime loans and a whopping 19% of all prime loans.

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Back to February 2015 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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