Comments on: Pre-payments are reducing value of mortgage-backed securities http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: FT Alphaville » Buying out the mortgage market http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-9935 FT Alphaville » Buying out the mortgage market Thu, 11 Feb 2010 13:59:13 +0000 http://www.creditwritedowns.com/?p=7995#comment-9935 [...] According to some analyst estimates, Freddie has a bit more leeway here than Fannie. But expect some impact on the [...] [...] According to some analyst estimates, Freddie has a bit more leeway here than Fannie. But expect some impact on the [...]

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-56250 Edward Harrison Fri, 24 Apr 2009 10:04:00 +0000 http://www.creditwritedowns.com/?p=7995#comment-56250 pwm, thanks. Your comments really do point out that there is no free lunch here. The Fed is manipulating rates in a way that is going to have unforeseen consequences, many of them negative. Apparently, the Fed and Treasury believe too much in the power of government to control markets. What really needs to happen is prices need to drop to an equilibrium level and we need to start fresh from that point on. If any propping up should be done, it should be for former homeowners, now displaced. pwm, thanks. Your comments really do point out that there is no free lunch here. The Fed is manipulating rates in a way that is going to have unforeseen consequences, many of them negative. Apparently, the Fed and Treasury believe too much in the power of government to control markets. What really needs to happen is prices need to drop to an equilibrium level and we need to start fresh from that point on.

If any propping up should be done, it should be for former homeowners, now displaced.

]]> By: pwm http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-56246 pwm Fri, 24 Apr 2009 07:48:00 +0000 http://www.creditwritedowns.com/?p=7995#comment-56246 At the same time, prepayment risk gets replaced with extension risk. And extension risk will matter a lot if the interest rate environment becomes adverse, as we can reasonably expect it to, given a deteriorating ability to service increasing debt levels. Fannie, Freddie, and soon the Fed are the three biggest depositories of this extension risk, unless you want to count the banking system as one entity. I know some of this is laid off in the derivative markets, but it does not disappear, and is very large given the scale of mortgage debt out there. Very good post Ed. At the same time, prepayment risk gets replaced with extension risk. And extension risk will matter a lot if the interest rate environment becomes adverse, as we can reasonably expect it to, given a deteriorating ability to service increasing debt levels. Fannie, Freddie, and soon the Fed are the three biggest depositories of this extension risk, unless you want to count the banking system as one entity. I know some of this is laid off in the derivative markets, but it does not disappear, and is very large given the scale of mortgage debt out there.

Very good post Ed.

]]> By: barryschaeffer http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-56243 barryschaeffer Fri, 24 Apr 2009 03:37:00 +0000 http://www.creditwritedowns.com/?p=7995#comment-56243 Ed, Thanks for sharing your hard-earned insights of the mechanics of mortgage pools. At least I hope I won't get whacked when these chickens come home to roost. Unless the Feds stick me with the bill again... Barry Ed,

Thanks for sharing your hard-earned insights of the mechanics of mortgage pools. At least I hope I won’t get whacked when these chickens come home to roost. Unless the Feds stick me with the bill again…

Barry

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-56240 Edward Harrison Thu, 23 Apr 2009 19:07:00 +0000 http://www.creditwritedowns.com/?p=7995#comment-56240 The problem with the prepayments is that they are making the legacy assets worth even less. So, over the medium-term, these banks will be carrying around assets at inflated prices. It is not clear in the least that all the banks can be adequately recapitalized before they finally must take the losses on those assets To the degree that there is a shift from some asset holders to other as the prepayments and refinancing occurs, those institutions holding legacy assets without adequate new streams of cash flow from the refinancing are going to suffer. These pre-payments guarantee that someone is going to end up with the Schwarzen Peter. The problem with the prepayments is that they are making the legacy assets worth even less. So, over the medium-term, these banks will be carrying around assets at inflated prices. It is not clear in the least that all the banks can be adequately recapitalized before they finally must take the losses on those assets

To the degree that there is a shift from some asset holders to other as the prepayments and refinancing occurs, those institutions holding legacy assets without adequate new streams of cash flow from the refinancing are going to suffer.

These pre-payments guarantee that someone is going to end up with the Schwarzen Peter.

]]> By: Anonymous http://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-56239 Anonymous Thu, 23 Apr 2009 18:59:00 +0000 http://www.creditwritedowns.com/?p=7995#comment-56239 Though i understand your rational on MBS valuations, one question comes to mind, is it not better the good gets seperated from better sooner than later. So instead of the whole world treating an MBS with lets say 50% (pre payment possible) and 50% (non prepayment possible) as same as 100% bad/toxic. This creative destruction will eventually help the MBS market (possibly through TALF). Though i understand your rational on MBS valuations, one question comes to mind, is it not better the good gets seperated from better sooner than later. So instead of the whole world treating an MBS with lets say 50% (pre payment possible) and 50% (non prepayment possible) as same as 100% bad/toxic.

This creative destruction will eventually help the MBS market (possibly through TALF).

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