From: PaPaPeng 
Newsgroups: misc.invest.stocks misc.consumers.frugal-living misc.invest.real-estate
Subject: Re: Where did the 400 billion USD in subprime mortgage losses go
Date: Fri, 23 Nov 2007 19:35:48 GMT
Bytes: 5934

On Fri, 23 Nov 2007 00:25:17 -0800, SMS ???• ?
 wrote:

>What's so strange is why the banks weren't taking the initiative to 
>renegotiate these loans, i.e. lowering payments by stretching out the 
>term, or lowering interest rates--anything to keep the buyer from 
>defaulting.


That's because the banks and the investment houses don't actually own
the original mortages.  The banks and IHs may be the third, fourth or
higher level owners of investment certificates.  These investment
certificates are based on the perceived value of the certificates
issued by another (4) financial institution who may have valued their
certificates they issued based on the investments they bought from
someone else (3 &2).  The original loan company(1)  no longer owns the
mortages it sold to bank (2) that bundled them into an investment
block of subprime mortages.


To get down to the roots of the problem a housing loan company issues
loans.  Its sales personnel hype subprime loans because their earnings
and the loan company's  is based on the size of the loan not the
borrowers' ability to service the loans.  These subprime loans are
given on a higher interest rate to justify the risk.  Some loan
company or bank then bundles the loans together and sells them to a
another bank or IH as a single unit of investment.  The attraction is
that its unlikely all of the loans will default at any one time.  This
will average out the good ones and still pay a good return.  A key
point to remember is that the original loan company no longer owns the
mortages.  The home owner has never met the new entity that he makes
his monthly payments to.

In good times this works. The primary owner of these bundled
investments borrows money from another bank or IH using these subprime
bundles as security.  The figures look good and the lending bank is
only too happy to lend to a large borrower who looks very capable of
paying back the interest and the principal.  The bank has a " loans
issued" asset that is bringing in earnings and its own book value
increases.  This allowing it to borrow from other banks or to issue
more loans. That's what banks do.   And so on as loans multiply
"assets" along the banking-financial system we have an economic boom.

Now when the subprime cirsis broke the company holding the real
mortages cannot pay the interest on the loans it borrowed from the
banks to buy these bundled mortages.   It goes belly up.  At last
count more than a hundred housing loan companies went belly up.  
"Since late 2006 
189     
major U.S. lending operations have "imploded" 
http://ml-implode.com/  

The lending bank's only recourse is to seize the bundled mortages to
recover its loans.  This bank is not in the housing loan business.  It
will have trouble sorting out which mortage is in default, which one
can be rescheduled and which can be foreclosed.  It doesn't know what
these mortages are actually worth now.  The next bank that or the IH
that accepted the bundled subprime certificates  and invested in them
doesn't even have the recourse to sieze the mortages.  All they have
are pieces of pretty paper.  They can't force the issuing institution
to make good and therefore drive them into insolvency and the investor
loses all.

If you can't follow the explanation so far neither can the banks and
FHs and they have no idea of what they will eventually lose for they
have no idea of what they do or do not own that is solvent.    Morgan
Stanley took a $3.7 billion write off.  CITIGroup  is in for $15
billions.  Everyone is waiting for more banks and FHs to announce
their losses and that's only the first round.  Revised figures are
expected to be worse.  In the UK the Treasury was foolish enough to
try to rescue Northern Rock and may have to write off UK pounds 23
billions (USD 47 billions) of tax payers' money.
http://www.guardian.co.uk/business/2007/nov/23/northernrock.bankofenglandgovernor
(follow the back articles at the bottom of the current one) .

Governments and banking agencies have to unsnarl the banking system
first.  Unsnarling individual mortage holders will have to wait.

For more reading on the subprime and coming economic crisis go to Asia
Times online at http://www.atimes.com/

Among the many excellent articles Mogumbo Guru writes hunorous
articles on a serious subject and provides a good insight into
financial and economics you won't get elsewhere.

sample: THE MOGAMBO GURU
More than 'sheets' hitting the fan
We're talking about banks' balance sheets, and the numbers seem so
horrific that we are suddenly thinking about banks going belly up.
(Nov 20, '07)  Full article in
http://www.atimes.com/atimes/Global_Economy/IK21Dj01.html