Honkytonker asked a good question about CIM (and by extension about MFA and IVR).
If the banks are forced to buy back billions of defective mortgages at par, won’t that be a windfall for mREITs that own MBS bonds they bought at deep discounts?
If that were the only effect, the answer would be an unqualified “Yes.”
But there is seldom only one effect, and I think the optimists on these names have missed the negative.
When the big mortgage servicers stubbed their toes on assembly-line foreclosures, the banks quickly stopped their own machine. That should tell you how seriously they thought it might be.
After all, when a foreclosure has already had its notices sent to the delinquent borrower and the next step is to file the papers in court to seize the property, the borrower is living rent free and the lender is taking a loss equal to the cost of maintaining the property plus paying its taxes and insurance, plus any additional decline in the value of the property.
Delaying the process will most certainly increase the loss to the beneficiary of the final recovery from sale of the foreclosed property. Increased cost for the process, including paying people to read what they’re signing, will also cut into the eventual recovery.
Since this applies to every delinquent loan in the moratorium pipeline (more than 100,000 loans in the 23 judicial foreclosure states that BankAmerican delayed), those losses and delays are significant.
We have to weigh that loss, which will hit bondholders like CIM, compared to the loss-shifting that will go on when banks are forced to take back loans or even turn over the houses to the occupants (formerly the borrowers, or “owners”).
I suspect that the number of cases where the banks actually do buy the loans out of the securitization pools will be minimal, and will also be delayed at least a year on average.
In the mean time, the value of houses bought from foreclosure sales will decline, perhaps another 10% or more, as potential buyers weigh the risk of having their purchase repudiated at some point in the future.
Between the increased loss ratio caused by delays (call that a couple of months optimistically, or six months conservatively), lower sale prices, and increased expense to process the paperwork, I give the entire process a likely increase in loss of about 15%. If it’s that high, then the only way the positive of having the loss absorbed by the lenders instead of the MBS bondholders would offset the increased losses now built into the future would be if the banks were forced to buy back at least one sixth of the loans that go into foreclosure.
Giving some weight to the time value of money, especially in the Chimera case with its front-end re-REMIC bonds that must be paid off before Chimera shareholders get any cash, I think we’d need to see about one in five delinquent loans turn into bank buybacks for this to be a net positive for CIM. It’s not quite that extreme at IVR or MFA, since they didn’t do nearly as much re-REMIC securitization, but the direction of the positive of bank buybacks vs the negative of bigger investor losses still holds true.
All 50 Attorneys General have said they’ll investigate. That means the additional delays and expense associated with doing it right and checking the work will apply nationwide. One unknown is how many people (like me) who continue to pay their mortgages after their lender went bankrupt will decide at some point in the future to challenge the validity of our mortgages or start living in our houses rent free. While I will never do that, I think some others will.
As I said a couple of weeks ago in my post “What Are They Selling?,” I suspect there won’t be a massive house giveaway with millions of delinquents (essentially squatters) getting free houses. I also don’t think banks that lent money, even if their paper-handling stinks, are going to be forced to take these losses. At most, they will settle with bondholders as a class, and come up with a loss-sharing arrangement on the truly messed up files.
That doesn’t change the fact that the expected losses on the mortgage pools have gone up, and the delay until payment from recovery has gone up even more. Those losses will be borne, and any investor in those MBS bonds had better face the reality that 100% of those losses are currently theirs. The banks may take some of those losses eventually, but I wouldn’t be interpreting these recent events as a big positive unless and until I see the banks taking out their checkbooks.