Tuesday, October 23, 2007
subprime recovery rates disastrous
This all sounds good, but I’m still wondering why this, why now? Well I got an email this morning from Janet Tavakoli of Tavakoli Structured Finance. She practically eats mortgage data for lunch. She says Countrywide may seem like it’s doing this out of the goodness of its big ol’ corporate heart, but really it has to do with the fact that recoveries on subprime loans are far worse than ever anticipated so far.
Here’s what she writes:
“Last week I met with a major mortgage servicer of geographically diverse U.S. subprime loans. They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable.”
Tavakoli says the servicer has been selling loans for 3-6 cents on the dollar. What are the issues? Legal costs relative to the low loan balances are huge and delays are long. Values of the homes are nowhere near what they were, so they’re looking at negative equity.
In other words, Countrywide is saving its own skin, as well as saving home ownership. The company simply has to do this because there is no way it can survive otherwise. Obviously they are seeing the recovery rates and just don’t want to risk it. This is a pre-emptive strike, and I say no matter what the motivation, it’s a positive move from Countrywide.
the most positive move of several horrifyingly disastrous possible moves, perhaps. if recovery rates on some significant slice of subprime defaults is genuinely less than 10% after time and expense considerations, the devastation in credit markets is going to be considerably worse than anyone had previously imagined. can ANY of the big five investment banks tolerate that kind of loss recovery beneath their billions of mortgage-backed structured debt? what about citibank? if this is what we can expect going forward, the value of most rmbs will be struck to zero.
perhaps it's becoming more understandable now exactly why abx indexes have completely tanked in the last two weeks.