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 a finance news and opinion site Sat, 20 Mar 2010 23:59:54 +0000 hourly 1 By: FT Alphaville » Buying out the mortgage markethttp://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: Indiana Court of Appeals » Securitizationhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-5064 Indiana Court of Appeals » Securitization Mon, 04 May 2009 11:45:04 +0000 http://www.creditwritedowns.com/?p=7995#comment-5064 [...] Pre-payments are reducing value of mortgage-backed securities … [...] [...] Pre-payments are reducing value of mortgage-backed securities … [...]

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-8090 Edward Harrison Fri, 24 Apr 2009 15:04:07 +0000 http://www.creditwritedowns.com/?p=7995#comment-8090 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.<br><br>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: pwmhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-8089 pwm Fri, 24 Apr 2009 12:48:48 +0000 http://www.creditwritedowns.com/?p=7995#comment-8089 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.<br><br>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: Edward Harrisonhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4879 Edward Harrison Fri, 24 Apr 2009 11:04:07 +0000 http://www.creditwritedowns.com/?p=7995#comment-4879 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.<br><br>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: pwmhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4878 pwm Fri, 24 Apr 2009 08:48:48 +0000 http://www.creditwritedowns.com/?p=7995#comment-4878 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.<br><br>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: Edward Harrisonhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4780 Edward Harrison Fri, 24 Apr 2009 08:04:07 +0000 http://www.creditwritedowns.com/?p=7995#comment-4780 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.<br><br>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: pwmhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4776 pwm Fri, 24 Apr 2009 05:48:48 +0000 http://www.creditwritedowns.com/?p=7995#comment-4776 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.<br><br>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: Barry Schaefferhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4771 Barry Schaeffer Thu, 23 Apr 2009 20:37:51 +0000 http://www.creditwritedowns.com/?p=7995#comment-4771 Ed,<br><br>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...<br><br>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 Harrisonhttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4768 Edward Harrison Thu, 23 Apr 2009 17:07:20 +0000 http://www.creditwritedowns.com/?p=7995#comment-4768 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<br><br>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.<br><br>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: Nirav_connects_the_dothttp://www.creditwritedowns.com/2009/04/pre-payments-are-reducing-value-of-mortgage-backed-securities.html#comment-4767 Nirav_connects_the_dot Thu, 23 Apr 2009 16:59:55 +0000 http://www.creditwritedowns.com/?p=7995#comment-4767 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.<br><br>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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