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Mortgage Discussion 10/22/2010

Mortgage Discussion 10/22/2010. Securitization. Securitization has been the most significant trend in the financial industry for the past 30 years Primary reason for decline in bank share of assets Reduces costs to consumers Increases complexity Introduces possible moral hazard/conflicts

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Mortgage Discussion 10/22/2010

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  1. Mortgage Discussion10/22/2010

  2. Securitization • Securitization has been the most significant trend in the financial industry for the past 30 years • Primary reason for decline in bank share of assets • Reduces costs to consumers • Increases complexity • Introduces possible moral hazard/conflicts • Moves assets from banks to institutional investors

  3. Role of FNMA & FHLMC • Finance directly $2T mortgages • Guarantee even more • Establish underwriting standards for the “prime” mortgage market • Cause distortions • Credit allocation programs • Do not discern between “good” markets/states and “bad” markets/states

  4. Home Loan Rates Article • 30 year mortgages at 4.27% • Could be 3.80% • Larger than normal spread between note and secondary market rate • Oligopoly of big banks? • Risk that loans might not qualify • MBS rate is 3.21% • 4.27% - 3.21% = 1.06% • Normal around .60% • Loan rate could be 3.21% + .60% = 3.81%

  5. Pimco/NY Fed/BofA Article • Totla of $47B mortgages challenged • $105B of original par • Failures by Countryside • Origination • Servicing • Servicer required to put back loans • Loan modification question puts banks/servicer in the middle

  6. Foreclosure Article • Purchase of Countrywide is source of problems for B of A • Article as of 10/15 • From 10/12 to 10/21, BAC lost 16% while the S&P 500 gained 1% • Independent money manager estimated BAC loss at 50% of market cap • How mortgage modifications hurt investors • Particularly senior tranches

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