Do you know what will be all the rage in 2008 in the wake of the subprime crisis? “Rating cliffs” and “credit cliffs” when firms that have seen a slow erosion of their credit will all of a sudden drop like a stone. As I devoted a whole chapter to the subject back in 2003 when drawing some lessons from Enron’s demise, I decided to revive it for your enlightenment. Here it is from
Paul Jorion, Investing in a Post-Enron World, McGraw-Hill, 2003.
“Chapter 13: The perils of cliffs
Once upon a time, a company named Enron … Read the rest
Echanges is a financial journal published monthly by DFCG, the French association of financial officers and auditors. I was asked by Jean-François Casanova who will be the editor of a special issue devoted to securitization to contribute a piece on securitization in the light of the subprime crisis. Here it is, in an English translation.
Has securitization played a role in the subprime crisis and in the
credit dislocation that followed? If not, did securitization emerge unscathed from the turmoil where the role it played has been rightly or wrongly questioned? These are two valuable questions that need to find … Read the rest
Mr. Paul Schulten is asking me the following:
… Read the rest
“It is true that delinquencies and losses in residential mortgage backed securities (RMBS) are strongly correlated with home price appreciation (HPA) or in the current environment home price depreciation (HPD).
As we enter a period of possible decline in home prices these losses accumulate first to the lowest rated tranche in an MBS or ABS security and subsequently in order to the next highest rated tranches. Those in the lowest rated tranches, the b piece, have presumably already experienced some discomfort if not some losses on their investment.
My question for you
Among the remedies mentioned for the subprime crisis, I haven’t seen listed the system I went through when getting a mortgage in England back in those days. Here is how it worked: the first step would be for you to open an account with a building society; then you would start saving, sending a check whenever you could in whatever amount; one month at a time your account would then accrue interest. Until one day, when the fateful 20% threshold was reached you would receive in the mail a letter saying: “Rejoice: the time has come, and we’re going to … Read the rest
One of the greatest American traditions is for families to get together at Christmas and watch with ever-renewed delight Frank Capra’s “It’s a Wonderful Life.” Recent events in the financial world, and in the mortgage business in particular, suggest that the movie should be introduced with this important disclaimer: “WARNING: The movie you’re about to watch is a work of FICTION. Although it is not unknown for a banker to be essentially driven by the altruistic desire to have every citizen own his own home – and will even contemplate suicide if prevented from doing so – such motivation CANNOT … Read the rest
Blame is flying in all directions: mortgage lenders had stopped bothering whether or not borrowers could repay as they were passing the buck to Wall Street anyway; Wall Street firms were using subprime mortgages of any denomination as innocuous stuffing in Collateralized Debt Obligations (CDOs); regulators failed to curb the worst forms of abuse – that were no longer restricted to unregulated mortgage companies but had become rampant in the whole industry; homeowners, driven by greed, couldn’t be bothered with reading their loan contracts before signing them.
I’ve got an alternative explanation: each party was following its own well-conceived best … Read the rest
In a well-documented recent paper (*), Joseph R. Mason of Drexel University and Joshua Rosner of Graham Fisher & Co. ask if a chain of events has not begun unfolding that will end up in a situation where funding for the mortgage industry is massively curtailed. In their paper, Mason and Rosner draw a parallel between the role played presently by subprime loans within Collateralized Debt Obligations (CDOs) and a situation that arose in 2003 leading to the demise of the main collateral types used in those days to enhance CDO credit. These sectors were: manufactured housing, aircraft leases, franchise … Read the rest
In today’s Wall Street Journal, Andy Laperrière, a managing director of the Washington office of the ISI Group, wrote a piece on the crisis in the mortgage industry, I wrote to the Journal’s editor, the following letter:
In his “Mortgage Meltdown” (Wall Street Journal, March 21, 2007), Andy Laperrière assigns the residential real estate bubble to the boost to home prices that the subprime market has provided “at the margin.” By that he ignores that housing is segmented and although easier access to the lower part of the market has no doubt contributed at raising prices … Read the rest
In today’s Wall Street Journal, Alex J. Pollock a former President and Chief Executive Officer of the Federal Home Loan Bank of Chicago wrote a piece on the subprime industry, I wrote to the Journal’s editor, the following letter:
“In his “Credit Crack-Up” (March 12, 2007), Alex J. Pollock offers a perceptive summary of the current malaise in the subprime mortgage industry. Some of his comments however call for qualification.
1. The risk of “punishing of the innocent along with the guilty”
Some segment of the subprime industry falls unfortunately under the category of “predatory lending” where the lender … Read the rest