E S F Securitisation Data Report Q1:2008

[A.steve]

I'm not going to try to summarise comprehensively - the report is is fairly terse as it stands.

The highlights for me were seeing hard figures on the issuance of securitisation - and I found the admission that hardly any of the derisory amount of securitisation attempted has found third party investors - but, instead, sits on banks' balance sheets and is financed by the BoE's SLS and ECB equivalent. The graphs in 7.3 and 7.4 both caught my eye too... as they differentiate between UK prime and subprime RMBS. The credit spread graphs for the UK in 5.3 and 5.4 are also significant IMHO - both for prime and subprime. Section 10 was also particularly interesting - it gives the first breakdown I've seen in answer to the question "who's bought the securitised debt..." - I was surprised at how small a proportion appears to be held by hedge funds, for example.

http://www.europeansecuritisation.com/Mark...t%202008-Q1.pdf

[interestrateripoff]

it gives the first breakdown I've seen in answer to the question "who's bought the securitised debt..." - I was surprised at how small a proportion appears to be held by hedge funds, for example.

http://www.europeansecuritisation.com/Mark...t%202008-Q1.pdf

Perhaps the hedge funds realised it was a sh*t investment?

[newbie]

Great find.

It's amazing how much of the rubbish was churned out in Spain and how little of it was actually bought there.

Germany is in the opposite position. It didn't generate much but bought a fair bit.

Additionally, now that the RMBS markets are closed, the Spanish banks are funding themselves from the Bundesbank ECB.

It 'looks' like the Spaniards got one over the Germans... But the Spandiards won't be laughing if half the country is repossessed by the Germans.

[VeryMeanReversion]

Thanks for the posting, I think this report is very useful indicator for the future path of house prices. Some comments:

1. The UK leading the way on outstanding balances (Table 2.3). I'm surprised the Ireland figures were so low.

2. The UK RMBS outstanding balance figure on Table 2.6 at ~euro300bn is a shocker. I take it that means this is the amount of mortgage rubbish the UK banks couldnt dump on any other suckers.

3. The credit spread graphs just say meltdown.

4. UK AAA RMBS credit prices dont look too bad in comparison. Hardly indicative of an AAA 1:10000 loss probability though

5. Table 1.5 says UK issuance is around 10-15% of last years rate, not good for future approvals

Since mortgage approvals correlates with house prices in 6 months and approvals is based on securities issuance, then with a little bit of a logic jump, a return to 2003 issuance levels should mean a return to 2003 prices.

It all points to further reductions in mortgage approvals and even steeper declines in house prices. This crash is going to be faster than I thought.

VMR.

[A.steve]

2. The UK RMBS outstanding balance figure on Table 2.6 at ~euro300bn is a shocker. I take it that means this is the amount of mortgage rubbish the UK banks couldnt dump on any other suckers.

I think it is somewhat surprising... considering the rate of issuance... From past reports, these are the year-on-year new issues for RMBS:

2004 €105bn * (€75bn)

2005 €145bn * (€104bn)

2006 €138.8bn

2007 €132.5bn

2008 €6.1bn (First quarter only)

* => These are total securitisation figures - no independent figure for RMBS is supplied. Assuming similar ratios to 2006, the figure in brackets is an estimate for RMBS.

I think this implies that these securitisations have an average maturity of nearly three years. Assuming that the securitisation markets do not re-open (and, reading the latest report, there seems little reason to assume that they will) the mortgage lenders need to find financing for an addition ~€280bn over the next two years. If this is the case, should we expect to see the house price crash accelerate during both 2009 and 2010 - effectively making even stabilisation impossible until the existing securities have either matured or defaulted?

Can anyone see a flaw in my reasoning? Is this a new insight into how to establish an accurate projection for the future of the crash over the next couple of years?

Edited August 7, 2008 by A.steve

[Bloo Loo]

The attractiveness of securitisation was that when used with an SIV, the banks could create and sell as much as they liked.

This vehicle is now obsolete and will probably be outlawed as a capital requirements avoidance device very soon.

So these securities need to come back onto the issuers balance sheets, plus once back,the true value based on market value will need to be assessed.

Thats a lot of write downs, reducing even more the capital available to support loans, plus, the method is not now available to issue new securities at the fever pitch of the recent past.

Mortgages will continue to be tight, criteria will be tougher, and markets supported by these loans will fail.

[yellerkat]

What about those spreads on page 16? UK 3-5 Yr BBB RMBS Credit Spreads - Am I seeing right? 1000+bps?

[A.steve]

What about those spreads on page 16? UK 3-5 Yr BBB RMBS Credit Spreads - Am I seeing right? 1000+bps?

I think that's right... there's a 10% premium for BBB rated securities against UK assets. This, of course, has to be taken in context... Table 2.4 (page 7) shows that only 3.85% of the securities were BBB rated while 85.45% were AAA. Conversely, when we consider the rate of downgrades, in tables 3.1, 3.2 and 3.3 (on page 9) there likely remains cause for wider concern.

If we look at AAA prime with its 2% spread, that means that even mortgages at 7% are loss making today... pretty-much no-matter how 'prime' the borrower might be.

Edited August 7, 2008 by A.steve

[Ash4781]

What about those spreads on page 16? UK 3-5 Yr BBB RMBS Credit Spreads - Am I seeing right? 1000+bps?

Nice charts

[?...!]

How about this for a fag packet calc...

I will for the purpose of this demo, assume that deposits will remain unchanged throughout all the ongoing financial turmoil.

Assume UK RMBS issuance figures rebound and moderate at cira 35 billion euros per year, from a peak of 132 billion.

That would take approximately 100 billion euros out of the UK mortgage market (£80 billion) each year.

Lets assume that the number of approvals will eventually return to circa 110,000 pcm or 1.32 million mortgages per year.

That would mean the average mortgage size that the UK mortgage industry industry could offer (at pre bust approval levels of 110,000) would be... £60,606 less than it was during the peak. Staggering.

If UK RMBS demand returns, the level of that demand is very important in determining the support of future UK house prices. As is the number of approvals required for price stability.

My very basic calculation above does not demonstrate how far price will fall, it demonstrates where they could recover to post bust. Way off the high water mark.

I can also use this basic calculation to determine the support level of UK house prices with regard to current UK RMBS demand...

Issuance for 2008Q1 = 6.1 billion euros = 24.4 billion euros annually = £19.52 billion

Lets assume prices reach equilibrium at an approval level of 80,000 or 960,000 mortgages per year. (is this enough mortgages for everyone to find a buyer?)

That would mean the average mortgage issued would be £107,000 less than 2007Q4. Ouch.

Bearing in mind the average mortgage size approved in 2007 was £138,000, I think it's fair to say the worst is definitely yet to come the UK property market.

I think falls of £100,000 or more on the average house price look perfectly reasonable.

That would put 3-4 million people 100k in the red!

You can kiss the consumer economy goodbye. Start selling sterling now!

.

Edited August 7, 2008 by ?...!

[yellerkat]

Whoah! I'm going to bookmark that post, ?..!. A good few people could do with reading it.

Thank you.

[REP013]

How about this for a fag packet calc...

/Snip/

I think falls of £100,000 or more on the average house price look perfectly reasonable.

That would put 3-4 million people 100k in the red!

You can kiss the consumer economy goodbye. Start selling sterling now!

.

You really are a cheeky monkey!

Thanks for your analysis and to A.steve for uncovering this little gem.

Being told today at work that renting is dead money and it doesn't matter if prices fall if your not selling now seems utterly irrelevant.

Look out below.

[Injin]

How about this for a fag packet calc...

I will for the purpose of this demo, assume that deposits will remain unchanged throughout all the ongoing financial turmoil.

Assume UK RMBS issuance figures rebound and moderate at cira 35 billion euros per year, from a peak of 132 billion.

That would take approximately 100 billion euros out of the UK mortgage market (£80 billion) each year.

Lets assume that the number of approvals will eventually return to circa 110,000 pcm or 1.32 million mortgages per year.

That would mean the average mortgage size that the UK mortgage industry industry could offer (at pre bust approval levels of 110,000) would be... £60,606 less than it was during the peak. Staggering.

If UK RMBS demand returns, the level of that demand is very important in determining the support of future UK house prices. As is the number of approvals required for price stability.

My very basic calculation above does not demonstrate how far price will fall, it demonstrates where they could recover to post bust. Way off the high water mark.

I can also use this basic calculation to determine the support level of UK house prices with regard to current UK RMBS demand...

Issuance for 2008Q1 = 6.1 billion euros = 24.4 billion euros annually = £19.52 billion

Lets assume prices reach equilibrium at an approval level of 80,000 or 960,000 mortgages per year. (is this enough mortgages for everyone to find a buyer?)

That would mean the average mortgage issued would be £107,000 less than 2007Q4. Ouch.

Bearing in mind the average mortgage size approved in 2007 was £138,000, I think it's fair to say the worst is definitely yet to come the UK property market.

I think falls of £100,000 or more on the average house price look perfectly reasonable.

That would put 3-4 million people 100k in the red!

You can kiss the consumer economy goodbye. Start selling sterling now!

.

Needs it's own thread imo, Mr. Sifter.

[A.steve]

How about this for a fag packet calc...

Interesting, though - maybe - flawed. What seems to be happening now is that a much smaller number of similar sized mortgages is being offered... and I think this will continue to be the strategy that lenders stick to. It makes sense given that homes in negative equity are likely to adversely affect availability of finance for the existing portfolio - whereas homes that "simply won't sell" are not as serious an issue.

What do you think of my idea that it looks as if the majority of €300bn in existing securitisations look set not to roll - meaning that mortgage lenders will need to find alternative funding for those over the next 24 months? If this analysis is not flawed, it means that the shock to the mortgage market has only just begun.

[?...!]

You really are a cheeky monkey!

Thanks for your analysis and to A.steve for uncovering this little gem.

Being told today at work that renting is dead money and it doesn't matter if prices fall if your not selling now seems utterly irrelevant.

Look out below.

Financial illiteracy is rife, don't worry about it.

Most people are still expecting a recovery or another boom of some kind, these people are wrong.

Property values will fall broadly / remain low for 25 years. Due to a smaller working population and higher interest rates. Beyond that anything can happen, mainly depending on birth rates.

[?...!]

Interesting, though - maybe - flawed. What seems to be happening now is that a much smaller number of similar sized mortgages is being offered... and I think this will continue to be the strategy that lenders stick to. It makes sense given that homes in negative equity are likely to adversely affect availability of finance for the existing portfolio - whereas homes that "simply won't sell" are not as serious an issue.

What do you think of my idea that it looks as if the majority of €300bn in existing securitisations look set not to roll - meaning that mortgage lenders will need to find alternative funding for those over the next 24 months? If this analysis is not flawed, it means that the shock to the mortgage market has only just begun.

I agree that is what is happening atm.

But it leaves a massive oversupply, which is what is driving down prices.

As prices continue to fall lenders are able to approve an ever greater number of ever smaller mortgages.

Until supply meets demand and prices stabilise. Historically 85-100,000 approvals per month.

[ParticleMan]

I agree that is what is happening atm.

But it leaves a massive oversupply, which is what is driving down prices.

As prices continue to fall lenders are able to approve an ever greater number of ever smaller mortgages.

Until supply meets demand and prices stabilise. Historically 85-100,000 approvals per month.

If you're talking sub-£100k average mortgages (<3x salary multiples) conceivably the "mortgage" bit becomes un-necessary; a multi-generational family could easily amass the working capital required to purchase outright from accrued savings (and it'd obviously be more attractive to capitalise this way - no borrowing cost).

Aah, the joys of unleveraged consumption spending...

Edited August 7, 2008 by ParticleMan

[A.steve]

I agree that is what is happening atm.

But it leaves a massive oversupply, which is what is driving down prices.

As prices continue to fall lenders are able to approve an ever greater number of ever smaller mortgages.

Until supply meets demand and prices stabilise. Historically 85-100,000 approvals per month.

I presume you mean an over-supply of homes... with which I'd agree. What I don't see is lenders deciding to write a larger number of smaller mortgages. I suspect that they'll aim to write a smaller number of larger mortgages at maximum LTV - in an attempt to preserve their collateral values.

I see this resulting in slow declines in nominal price (as we've seen so far) but - quite possibly - sudden, abrupt and devastating falls in price when those who thought they only had a deposit end up buying outright without a mortgage. If this is to happen, the consequences would be enormous. I wonder if this risk has been adequately considered by the mortgage industry?

[REP013]

I presume you mean an over-supply of homes... with which I'd agree. What I don't see is lenders deciding to write a larger number of smaller mortgages. I suspect that they'll aim to write a smaller number of larger mortgages at maximum LTV - in an attempt to preserve their collateral values.

I see this resulting in slow declines in nominal price (as we've seen so far) but - quite possibly - sudden, abrupt and devastating falls in price when those who thought they only had a deposit end up buying outright without a mortgage. If this is to happen, the consequences would be enormous. I wonder if this risk has been adequately considered by the mortgage industry?

Why?

Surely banks need money?

If the point about the RMBS market shrinking and remaining small is true wouldn't it be better to make money with more transactions whilst spreading the risk further? 5% of 1 x 1,000,000 is 50,000 and 5% of 100 x 10,000 is still 50,000, the risk is spread across 100 rather than 1 and there's also the bumper set-up fees?

You may well be right but when I think of it this way the monkey gets my vote.

[REP013]

If you're talking sub-£100k average mortgages (<3x salary multiples) conceivably the "mortgage" bit becomes un-necessary; a multi-generational family could easily amass the working capital required to purchase outright from accrued savings (and it'd obviously be more attractive to capitalise this way - no borrowing cost).

Aah, the joys of unleveraged consumption spending...

I'm never quite sure what you are saying. Actually, sometimes I am sure but often I really haven't got a clue.

So, a family of Grandfather, father and son could easily find £100k, is this what you're saying?

But I thought the average savings were < £10k?

And my impression is that ?...! believes (and I'm not in a position to refute his beliefs) that the working populace will shrink pushing up productivity whilst increasing the tax burden to pay for the non-productive thus deflating spending power?

In this scenario I'm sure a large amount of the populace would have even less available cash and rely on smaller, more costly credit?

[Injin]

I'm never quite sure what you are saying. Actually, sometimes I am sure but often I really haven't got a clue.

So, a family of Grandfather, father and son could easily find £100k, is this what you're saying?

But I thought the average savings were < £10k?

And my impression is that ?...! believes (and I'm not in a position to refute his beliefs) that the working populace will shrink pushing up productivity whilst increasing the tax burden to pay for the non-productive thus deflating spending power?

In this scenario I'm sure a large amount of the populace would have even less available cash and rely on smaller, more costly credit?

The end of that spiral is the elimination of the banks and cash buying....it all depends on how far the ability of the bankers to continue to force and finagle themsleves into the artificial middleman position that has been "normal" for the last few decades.

[expatowner]

The end of that spiral is the elimination of the banks and cash buying....it all depends on how far the ability of the bankers to continue to force and finagle themsleves into the artificial middleman position that has been "normal" for the last few decades.

The world cannot function without banks.

I cannot imagine how you would think otherwise.

[Injin]

The world cannot function without banks.

I cannot imagine how you would think otherwise.

That's like saying the world cannot function without people being shot in the kneecaps.

Banks are a massive deadweight.

[A.steve]

What I don't see is lenders deciding to write a larger number of smaller mortgages. I suspect that they'll aim to write a smaller number of larger mortgages at maximum LTV - in an attempt to preserve their collateral values.

Why?

This would be the rational behaviour of banks more concerned about capital loss than writing the most lucrative fresh business. None of the lenders can ignore the liability of past lending... they need to provide the maximum scale of mortgage lending in order to minimise losses arising from forced sales. Providing finance for mortgages in negative equity at a price that doesn't precipitate widespread defaults is far harder than for houses with healthier loan to value ratios.

[expatowner]

That's like saying the world cannot function without people being shot in the kneecaps.

Banks are a massive deadweight.

They may appear to be "deadweight" as you put it.

I like to think of them more as "ballast" in sailing boat terms.

If you take out the ballast the boat flips over.

At worst they are a necessary evil - get over it.