randallg99
Bronze Contributor
this is a great question!!! thanks for asking this, Kidgas... it is a subject that is way too intricate for the average joe 6 pack or even the moderately experienced investor and involves layers and layers of paper all the way from agency to junk not to mention some of the most leveraged instruments the basic consumer has been subjected to without even the consumer himself knowing it.
in very basic simple terms, the spread on mortgages over the past several years have basically been nonexistent - if you compared short term vs long term yields, ie the 2yr note vs 5 yrnote or even against the 10yr, you will find that the spread was so minimal... we RE investors all know this for fact when we got commercial loans that were less than 5% from a BANk, and not a mortgage company!! anyway, on a pool of held outstanding loans, a company like CFC -countrywide was only able to make a 1.5% spread on the servicing of the port or `only` 15mil and have to cover all overhead....
so, while the spreads were piss thin, the mortgage companies incentive was NOT to hold the loans, but rather MAKE the loans and then sell them off as fast as they can for a minimal discount and then using this newly founded liquidity to fund new loans... the money that funds new loans come from the sale of existing mortgages and also with the issuance of preferreds and bonds. Trouble began at this stage - when the issuing for new money was coming in, it was not covering the nut of the expenses due to low, low spreads... afterall, why would I buy a pool of mortgages for x% when I could get another instrument at same rate without the risk ie treasuries so then premiums were paid (by CFC and the like to make their paper look more attractive). So, the money is then made by the comapny when the offerings are done and then when the loan is made to the consumer and charging dumb fees... also, keep in mind, the vast majority of loans make the most money for the banks/mtg company in the first several years... ESPECIALLY IO loans or even a regular fixed amor. loan when interest is highest in the front half and keeping it for a year made their books look much better than they really were.
This style of making money is akin to a pyramid scheme... the last ones holding the bags are ones stuck as we have seen hedge funds implode literally overnight as well as private equity groups got nailed to a wall making good on margin calls to save the mortgage pool investment. Right now, a lot of mtg bankrupted already, but from what I am reading, we will see significant liquidity crunches... Fannie mae skipped their September offering because the number of buyers for their paper is virtually nil... they would have to sell at discounts... just like CFC already did last week when Bank of Amer came into the picture and had to basically bend over and beg for someone to stick it them. to me, CFC was a dead man walking last week. Now, they luckily have BAC fingers in the holes... but the water keeps rushing.
Alas, the recent euphoria in the markets reacting to fed cuts is very over-done and while the fed has an obligation to stabilizing inflation (and keeping the economy in check), they will inevitably dilute the US $ and this is when the blood will spill into the streets...
didnt proof read. hopefully it makes sense and hopefully the wifee is ready to go out now... or maybe I might continue ranting!
in very basic simple terms, the spread on mortgages over the past several years have basically been nonexistent - if you compared short term vs long term yields, ie the 2yr note vs 5 yrnote or even against the 10yr, you will find that the spread was so minimal... we RE investors all know this for fact when we got commercial loans that were less than 5% from a BANk, and not a mortgage company!! anyway, on a pool of held outstanding loans, a company like CFC -countrywide was only able to make a 1.5% spread on the servicing of the port or `only` 15mil and have to cover all overhead....
so, while the spreads were piss thin, the mortgage companies incentive was NOT to hold the loans, but rather MAKE the loans and then sell them off as fast as they can for a minimal discount and then using this newly founded liquidity to fund new loans... the money that funds new loans come from the sale of existing mortgages and also with the issuance of preferreds and bonds. Trouble began at this stage - when the issuing for new money was coming in, it was not covering the nut of the expenses due to low, low spreads... afterall, why would I buy a pool of mortgages for x% when I could get another instrument at same rate without the risk ie treasuries so then premiums were paid (by CFC and the like to make their paper look more attractive). So, the money is then made by the comapny when the offerings are done and then when the loan is made to the consumer and charging dumb fees... also, keep in mind, the vast majority of loans make the most money for the banks/mtg company in the first several years... ESPECIALLY IO loans or even a regular fixed amor. loan when interest is highest in the front half and keeping it for a year made their books look much better than they really were.
This style of making money is akin to a pyramid scheme... the last ones holding the bags are ones stuck as we have seen hedge funds implode literally overnight as well as private equity groups got nailed to a wall making good on margin calls to save the mortgage pool investment. Right now, a lot of mtg bankrupted already, but from what I am reading, we will see significant liquidity crunches... Fannie mae skipped their September offering because the number of buyers for their paper is virtually nil... they would have to sell at discounts... just like CFC already did last week when Bank of Amer came into the picture and had to basically bend over and beg for someone to stick it them. to me, CFC was a dead man walking last week. Now, they luckily have BAC fingers in the holes... but the water keeps rushing.
Alas, the recent euphoria in the markets reacting to fed cuts is very over-done and while the fed has an obligation to stabilizing inflation (and keeping the economy in check), they will inevitably dilute the US $ and this is when the blood will spill into the streets...
didnt proof read. hopefully it makes sense and hopefully the wifee is ready to go out now... or maybe I might continue ranting!
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