Thursday, March 18, 2010

In the grip of the Undead

Principal writedowns and the fake stress test

Many investors in first-lien mortgages (bundled securities holders) will accept principal writedowns in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high likelihood of foreclosure, but holders of second-lien mortgages (banks) are a major obstacle to this. These second liens have little value – the first liens are well underwater, and the prospect for any real return on the seconds is negligible - but accounting rules allow holders of these seconds to book them at artificially high values. So many refuse to write down the loans, thus preventing a correction and a moving on

Posted by icarus @ 02:19 PM (914 views)
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One thought on “In the grip of the Undead

  • More on this at http://www.ft.com/cms/s/0fa0618c-2b0b-11df-93d8-00144feabdc0,html – any problem google ‘mortgage investors push for banks to write down second mortgages’

    BTW – More pressure is put on borrowers to repay second liens (usually held by banks) than to repay first liens (held by investors who bought the securitised RMBSs from, er, banks).

    The banks say they are holding out for ‘accounting guidance’ (or new accounting rules that would ease the impact on capital ratios?) but could they be waiting for another bailout to pay for principal writedowns?

    The banks passed last year’s stress tests (showing they could withstand losses on second liens) with flying colours but the FT article has the banks suffering ‘catastrophic’ losses if the first- and second-lien writedowns go ahead. Hmmm.

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