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befuddled

Mortgage Pool Data - Rising Delinquencies

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I'm not sure how many of you good people are aware of the mortgage bond market. Essentially, building societies and banks sell off large portions of their mortgage pools which are then bought by various investors, pension funds, insurance companies, cash managers, other banks etc.

Anyway, these are publicly traded product and as such publish various statistics and performance data regarding the underlying mortgages in each of them.

We are currently going through a very interesting period, it was at the end of 2003, start of 2004 that interest rates were at their low point of 3.5% rising to 4.75% by August 2004. Now the standard cheap period for new mortgages before you flip back to the standard (expensive) variable rate is, of course, 2 years. And what these mortgage pool statistics are beginning to show are rapidly rising delinquencies in payments on those loans as they roll off their previously cheap (affordable) rates and onto levels where people are failing to make their mortgage payments. These bonds are structured to be able to absorb a fair amount of loses before the end investors actually lose any money, but certainly the concern is that things are heading this way and some low-quality bonds (those with lots of self-certs and people with CCJ's) have begun to draw down on their reserve funds which are their to protect investors, effectively taking loses as people can no longer meet their monthly payments.

This is about as early an indicator as you can get that people are seriously struggling under the burden of debt they have taken on, and the reason we have had to put up with such a lag before trouble has emerged following the interest rate rises of 2004. This is not a problem that is going to go away, and is certainly only going to get worse.

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I'm not sure how many of you good people are aware of the mortgage bond market. Essentially, building societies and banks sell off large portions of their mortgage pools which are then bought by various investors, pension funds, insurance companies, cash managers, other banks etc.

Anyway, these are publicly traded product and as such publish various statistics and performance data regarding the underlying mortgages in each of them.

We are currently going through a very interesting period, it was at the end of 2003, start of 2004 that interest rates were at their low point of 3.5% rising to 4.75% by August 2004. Now the standard cheap period for new mortgages before you flip back to the standard (expensive) variable rate is, of course, 2 years. And what these mortgage pool statistics are beginning to show are rapidly rising delinquencies in payments on those loans as they roll off their previously cheap (affordable) rates and onto levels where people are failing to make their mortgage payments. These bonds are structured to be able to absorb a fair amount of loses before the end investors actually lose any money, but certainly the concern is that things are heading this way and some low-quality bonds (those with lots of self-certs and people with CCJ's) have begun to draw down on their reserve funds which are their to protect investors, effectively taking loses as people can no longer meet their monthly payments.

This is about as early an indicator as you can get that people are seriously struggling under the burden of debt they have taken on, and the reason we have had to put up with such a lag before trouble has emerged following the interest rate rises of 2004. This is not a problem that is going to go away, and is certainly only going to get worse.

Is there anywhere on the net I can see this data?

i.e the bonds prices and explanation of the structure for each MBS

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Befuddled,

Have been waiting for this to happen. The stats are simply not availbel to all and sundry on the web. Thought that something might be up when a couple of the mortgage UK biggies started to offload some of their mortgage portfolios onto teh Australian market - why go to all that trouble if the UK market was gong well.

Have the Europeans been big buyers? Have they been spooked by some of the recent losses on German commercial loan products?

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Befuddled,

Have been waiting for this to happen. The stats are simply not availbel to all and sundry on the web. Thought that something might be up when a couple of the mortgage UK biggies started to offload some of their mortgage portfolios onto teh Australian market - why go to all that trouble if the UK market was gong well.

Have the Europeans been big buyers? Have they been spooked by some of the recent losses on German commercial loan products?

Unfortunately this is not made easliy available on the internet for free. It is all public info, it just very hard to get hold of in one place. If you have access to Bloomberg then you can get a lot of it through there using the function <NI ABS>.

The market for MBS bonds is trading towards all time tight levels, meaning that investors are happily taking the risk of the products for less and less return. Europe and UK institutions have been the main buyers, an awful lot of risk being sold in US$ as well. Doesn't seem to be any great fear of loses within the investor community at present, as with all markets, they've not had their fingers burnt for so long they forget it can happen.

Given the current trading levels, it is not neccesarily anything other than simple arbitrage as the banks offload their mortgages books, as essentially they'd be mugs not to given current levels. Still, with rising arrears and likelihood of more, expect the direction of this market to be a genuine early indicator of the underlying market. As soon as investors start suffering losses they will demand more return on their bonds, this will remove the arbitrage and the banks/building societies will pass this extra cost on in the form of less competitive give-away cheap mortgages, make it harden to obtain self-certs at ridiculous implied earnings multiples, etc and transactions will fall considerably at the lower FTB end of the market. Hopefully this will pull what remains of the rug from under the market.

befuddled

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Cheers Befuddled.

Keep us posted on this. The MBS market has been a prime driver of the bubble and I reckon it will be a prime driver in destroying wealth in the future.

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Will do, its not exactly the fastest moving of markets though, this could easily continue for some time unless some loses begin to feed through to investors, more self-sustaining market nonsense....

An interest aside is that the US market has recently developed products which allow for taking short positions or a negative view on the market. As soon as these products began to trade the market widened vastly and will have severely hurt issuers of bonds now coming to the market. This has actually helped cool the US market in recent months and removes one of the links of the positive feedback loop of bubbledom. This product is slowly being taken up by the European market and is likely to have a similar effect of trading levels once it is formerly introduced. Expect this to grow as a market over the course of 2006.

befuddled

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  • 343 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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