About Your Missing Horses....

Monday, December 10, 2007
One of the gnomes of Zurich woke up with a bad limp this morning. How in the world did a Swiss bank get clobbered with a $10 billion loss in subprime mortgages written in the US? A seriously misplaced trust in innovation firmly attached to "respected names" seems to be the main answer. Aside from greed, of course.

One of the "respected names" washes its hands of the matter thusly:
While we realize this was a very limited sample, Fitch believes that the findings are indicative of the types and magnitude of issues, such as poor underwriting and fraud, which are prevalent in the high delinquencies of recent subprime vintages. In addition, although the sample was adversely selected based on payment patterns and high risk factors, the files indicated that fraud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools. Additionally, Fitch continues to attempt to expand its loan sample to provide further validation of its findings and will provide additional commentary as applicable.
See, it wasn't the credit rating company's fault, and, if you read very carefully and at length, it wasn't even the underwriter's (those folks who pay the credit raters) fault. It was the loan originator's fault and, in particular, the mortgage broker's fault. S & P, Moody's and Fitch were innocent bystanders who extended trust in good faith, although in retrospect, perhaps a tiny bit unwisely.

What utter hogwash.

The increase in default rates was traceable within months of the setup of each of the "deals". Each packaged mortgage "deal" is seasoned and the results are required to be reported monthly. The big banks set up indices to follow "valuation" of how creditworthy groups of deals are that allow one to follow a deal down to about the tranche level. ABX is one such index and Citigroup Mortgage Loan Trust 2007-AMC2 is a sample of a constituent element of the index. Go to the EDGAR CIK search engine, pop in "Citigroup Mortgage Loan Trust" and take a look at the list of deals, open 2007-AMC2 and take a look at the distribution reports. This is a $2 billion, ten thousand loan deal that was set up in February, 2007 and had over ten per cent of its loans at least 30 days past due by August. By December, twenty per cent were at least 30 days past due with half of them moving to the bankrupt, foreclosed or REO status group. My bet is that at least 500 loans out of the 1,000 that were sour in August were outright fraud of a sort that Fitch's report doesn't really identify. It doesn't take more than a shady realtor coupled with a soft appraiser and a "hot" mortgage broker to scam a sucker like Citi.

It might be cheaper for Citi in the future just to leave their vault doors open to the general public one day a year. Maybe they could get Fitch to pick up part of the tab? It couldn't hurt either of their current reputations very much. A sad part of this entire charade is that Citi wasn't anywhere near the worst player. The saddest part is that the reporting on the charade still doesn't identify the fact that the whole thing was driven by cost cutting at the origination level. The originators were driven by the underwriters into substituting simplistic (and easily scammed) FICO scores for "legwork" that really only entailed making a series of phone calls. The "savings" per app couldn't have been more than $200 - and it's not as if the borrower didn't pay for it in the first place.

3 comments:

richard mcenroe said...

Ten billion is a lot of fillings...

vnjagvet said...
This comment has been removed by the author.
vnjagvet said...

Follow the money on this and I hava a hunch you will find many of the same names that brought you the Bank/REIT/condo problems of the 70s, the S&L/developer problems of the late 80s and the tech/internet bubble of the 90s.

The transactional fees on this stuff attracts lawyers, accountants, financial advisors and all sorts of "consultants" who then create an incestuous network that almost believes its own bs.

Trust me, Rick, they are now already working on the next fad.

Word verification pugazm.

That's when a boxer has more women in the room than is healthy for training.