A really cheap mortgage idea.

Maybe this is a really dumb idea and perhaps someone can help think through this. Banks are currently valuing slabs of mortgage securities sitting on their books at 22 cents in the dollar in some cases. Why don’t the banks simply offer to sell them back to the holders at the same level or a little higher and close out the mortgage? If they are able to achieve a slightly higher price the banks could actually reduce their provisions.

11 thoughts on “A really cheap mortgage idea.

  1. Not totally in this case. i think there are a lot of people that were caught with mortgages that set at much higher rates later on.

    they may however be able to service… not repay- service a loan at 60% discount.

  2. JC, what you’re saying is the bank in possession of the property now values it at only 22% of its value when the original loan was made.

    If that’s really the case, there will be a lot of people willing to buy the property. They don’t need to sell it to the poor bugger who’s just lost it.

    I’ve read that real estate prices have actually only fallen 10-20%, so I suspect the banks have got it wrong.

  3. Unfortunately, no one bank owns the mortgages. They’ve been packaged together, sliced up and distributed among a number of different banks.

  4. Good point but not entirely true DC. The securities are packaged like you say however there is separate and identifiable collateral behind each piece of security.

  5. David:

    The last mortgage backed CDO deal i heard was that Merrill’s sold to a fund at 22 cents in the dollar. this was public information by the way splattered all over the press.

    I’m also hearing that the 10-20 is bullshit to some extent as fire sale auctions are getting around 40 to 50%.

    So yea the mortgage value doesn’t seem to equal the property value. Funny hey but no reason why it shouldn’t by the way?

  6. Sorry, but this is a really dumb suggestion.

    “Banks are currently valuing slabs of mortgage securities sitting on their books at 22 cents in the dollar in some cases. Why don’t the banks simply offer to sell them back to the holders at the same level or a little higher and close out the mortgage?”

    The 22% value is on the notes of structured finance vehicles, like CDOs, not the underlying collateral. A CDO sells notes (bonds/debt) to finance the purchase of a whole bundle of cash flow generating assets. The notes are tranched from senior to subordinated. The senior notes get paid first out of the whole pool of collateral, so are given AAA ratings. This means the interest rate paid to the senior note holders is low, because they are theoretically quite a safe investment. The subordinated notes don’t get paid until all the tranches above them have been paid. They have lower ratings and, consequently, earn a higher rate of interest. When things turn even just a little bit bad for the pool of collateral as a whole, its very bad for the holders of the bottom tranche of notes – and these notes loose their value fast. Essentially, that’s how a 10% drop in property prices (the underlying collateral) turned into an 80% drop in the price of subordinated notes (or whatever the actual figures are).

    “The securities are packaged like you say however there is seperate and identifiable collateral behind each piece of security.”

    This statement is false. In fact, it would defeat the whole purpose of the structured vehicle – you don’t know in advance which mortgage loans are going to default or which properties will decrease in value, so how could you achieve AAA rating on any of the notes? The AAA notes have first crack at the whole pool of collateral, that’s how they got their rating.

    “Unfortunately no one bank owns the mortgages.”

    No, but there is a special purpose vehicle in a no-tax jurisdiction somewhere that owns the mortgages, and there is an agent who theoretically may be able to negotiate amendments to loan terms with borrowers or sell secured properties (if they have been delegated that authority), but that wouldn’t actually resolve the crisis for the reasons outlined above.

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