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Yeah the thing that I don't understand is, so it is dead with no payments but their is collateral behind that asset so what happens when the foreclosures are so

by kls 16y ago

Yeah the thing that I don't understand is, so it is dead with no payments but their is collateral behind that asset so what happens when the foreclosures are sold. Do they receive a check for their portion of the asset sale? That would offset the the numbers I should imagine. So if they have collected roughly $450 of their $1000 investment and then receive a $300 check from the asset sale. that is $750 of their principal returned. In regards to the banks that hold these assets they received a bailout so I would assume that they still see a profit on these "Toxic"assets due to the bail out. As well this asset was purchased in the middle of the housing fall out while some of the other assets had been producing returns for some time before this whole mess. Also what about that PMI they make people buy if they finance more than 80% that is supposed to protect the mortgage holders principal, in the event of a default. One of the reasons I love math is one of the reasons I hate it the numbers are so easy to skew, to someone who does not know what variables to look for. I am not accusing NPR of anything here after all they are journalist by trade not economists or bankers, but I think there are some missing variables here.

_delirium 16y ago
From what I can tell, this is after the write-downs from sold assets: someone walks on their mortgage, the bank sells it in a foreclosure sale, some of the proceeds are distributed to the bond holders by tranches, and then that asset is removed from the bond. The way tranching works, lower tranches like this one lose assets that way disproportionately quickly. Their bond now has no remaining assets on which it has any claims left, so any cash they've already gotten is the full value of the security.
- kls 16y ago
  Thanks, for clearing that up but from the charts I saw on the site, there where still assets in bankruptcy which temporarily stays the asset sale, I could be totally misreading the info (it happens) but it did look to me that their where still unsold assets under the umbrella protection of bankruptcy proceedings. As well I still do not see how PMI plays into their return.
anigbrowl 16y ago
My understanding of these things is that this kind of debt is mostly unsecured. If a house is repossessed and sold at a loss after the mortgage has fallen into arrears by more than a certain percentage, the unsecured creditors get nothing. Of course, now nearly every repo is sold at a loss, and there are 2x as many empty properties sitting on the books as are advertised for sale, so that's not going to change for a while. Remember that the toxic asset is not a collection of salami slices from different mortgages - there are laws against dividing up a mortgage or loan interest that way, I believe. The slices were claims on the profit - the sum of mortgage payments minus cost of capital, and were paid out in exchange for cash up front. Holding these assets seemed like a good idea at the time they were issued, because even if Joe Blow lost his job or whatever, the rising property market meant that he or the loan service company just had to be patient for a few months - then the house could be sold for more than the value of the debt, the unsecured creditors would be OK. Joe Blow himself would have a clean slate unless he was truly incompetent, because before the bubble burst it was fairly easy to offload the property and look like a responsible individual who serviced debt promptly. I heard of people doing that and ending up with a better credit rating as a result, because on paper they were now the sort of person that does profitable 6-figure real estate transactions. The smart ones gave classes, the stupid ones believed their credit reports and started thinking they were financial wizards. On the issue side, it worked like so: I give Joe Blow a $500k mortgage, he is supposed to give me back $1m over 20 years or whatever the compound interest + principal amounts to. Well great, but now I have to wait a decade before I start actually making money on the deal. Traditionally, banks' business model is to control enough capital and manage risk well enough to play that long game, in fact to play a longer game than anybody else on the market. But in recent decades, so much money had gone into the stock market via retirement funds etc. that bringing in your profit over a 10-30 year period looked rather tame. Sure, there were big profit multiples in the credit card business, but it takes time for most people to run up substantial credit card debt, and the kind of people who rack up house-size debts quickly are unfortunately the sort of people who tend to pay them off too because they understand how to use credit effectively, so they are not generating any profit. And in a rising market, those long-term profits seem to have a very high opportunity cost, because although they are secured by property, I could probably double my money faster by investing it in some dot com thing, whatever that means... Meanwhile, I'm out the $500k I just gave to Joe Blow, and my competition across the street is just celebrating an IPO of clueless,com that paid off at 32:1. Damn! But wait - YOU look like a smart guy. Look, I have this mortgage on Joe Blow's house, and 99 others just like it. Houses - lovely solid assets, not like those inflationary stocks. They're even better than gold, because you can't live in a goldbrick, amirite? And who invests in gold, that's no way to make money any more, the 70s were a long time ago. I'm gonna collect $500k from Joe over the next 20 years! He'll pay because it's his house, duh. My cost of capital from the federal reserve? Cheap, they only want $100k in interest, God bless Alan Greenspan. No, you can't raise capital there, you need a banking license like I have but they're like taxi medallions, you gotta wait years to get one. But look, about this $400k profit I make after I pay the Fed off. Times 100 mortgages that I've issued, that's $40 million dollars of pure profit - and this profit is on debt secured with $50 million worth of houses...at today's prices. And they're not making any new land, heh heh! Oh, you wish you could get in on this? Yeah, too bad you don't have a banking license like me...but come to think of it, don't a lot of taxi guys rent out their cab, and everybody wins? Yeah! How about this: you give me $50 million, and I'll split the $40m profit with you, even Stevens, $20 mil each and I'll do all the hard work of collecting the payments each month and I'll hold all the risk. What's in it for me? Well, I'll issue some more mortgages, I got people trying to buy property faster than the hired help can build it. What's in it for you? $20 million my friend, and peace of mind. How long do you think this bank has been here? OK, it was more complicated than that - there was an investment bank in the middle giving the sales pitch and gift-wrapping the item, and they were getting paid a commission up front. But this was the basic transaction that both sides suckered themselves into, and on which both sides lost money while the investment bank kept its cash commission.
goatforce5 16y ago
A follow up post touches on this: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe... There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid. If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk. (I've almost certainly got some of that wrong - someone correct me!) Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible. http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890 http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...
- fanboy123 16y ago
  This might make understanding easier. Start 100M mortgages. 100M bonds (in reality for "safety" it was more like 95M in bonds.) 80M was part of the upper class. 20M was part of the lower class. If 30M of mortgages went busto without EVER paying a single payment and houses sold were worth 20M then 100% of the lower class got destroyed. Assuming the other 70M worth of mortgage holders kept paying until principle was returned the upper class never saw a single cent of loss and the lower class never gets paid a single cent of principle or interest. It is a clever piece of financial engineering that allows risky loans to be "safe." It is also why writeoffs can be complete for the lower class even though the asset (house) is sold with a positive value.
fanboy123 16y ago
It is complicated. You are correct in that when the house is sold investors get a recovery. Not all investors are created equal though. Difference pieces of a deal were paid different interest rates (according to risk) and as such they get allocated recoveries in a specific order. If you notice Toxie stopped getting payments a few months in and is declared dead a few months afterwards. This happens when the amount of losses eats through your piece of the pie. When the house gets sold is is sold for something less than the mortgage was worth. The losses get allocated to the riskier pieces of the deal which protects the lower interest rate/more "protected" higher pieces of the deal. Also banks got bailouts which cushion them against losses but do not prevent losses. A loss on an asset is a loss on an asset. The federal reserve buying mortgage bonds was not considered a bailout per say but are helping to prop up prices which indirectly help the banks.

by kls 16y ago

_delirium 16y ago

From what I can tell, this is after the write-downs from sold assets: someone walks on their mortgage, the bank sells it in a foreclosure sale, some of the proceeds are distributed to the bond holders by tranches, and then that asset is removed from the bond. The way tranching works, lower tranches like this one lose assets that way disproportionately quickly. Their bond now has no remaining assets on which it has any claims left, so any cash they've already gotten is the full value of the security.

kls 16y ago
Thanks, for clearing that up but from the charts I saw on the site, there where still assets in bankruptcy which temporarily stays the asset sale, I could be totally misreading the info (it happens) but it did look to me that their where still unsold assets under the umbrella protection of bankruptcy proceedings. As well I still do not see how PMI plays into their return.

anigbrowl 16y ago

My understanding of these things is that this kind of debt is mostly unsecured. If a house is repossessed and sold at a loss after the mortgage has fallen into arrears by more than a certain percentage, the unsecured creditors get nothing. Of course, now nearly every repo is sold at a loss, and there are 2x as many empty properties sitting on the books as are advertised for sale, so that's not going to change for a while. Remember that the toxic asset is not a collection of salami slices from different mortgages - there are laws against dividing up a mortgage or loan interest that way, I believe. The slices were claims on the profit - the sum of mortgage payments minus cost of capital, and were paid out in exchange for cash up front. Holding these assets seemed like a good idea at the time they were issued, because even if Joe Blow lost his job or whatever, the rising property market meant that he or the loan service company just had to be patient for a few months - then the house could be sold for more than the value of the debt, the unsecured creditors would be OK. Joe Blow himself would have a clean slate unless he was truly incompetent, because before the bubble burst it was fairly easy to offload the property and look like a responsible individual who serviced debt promptly. I heard of people doing that and ending up with a better credit rating as a result, because on paper they were now the sort of person that does profitable 6-figure real estate transactions. The smart ones gave classes, the stupid ones believed their credit reports and started thinking they were financial wizards. On the issue side, it worked like so: I give Joe Blow a $500k mortgage, he is supposed to give me back $1m over 20 years or whatever the compound interest + principal amounts to. Well great, but now I have to wait a decade before I start actually making money on the deal. Traditionally, banks' business model is to control enough capital and manage risk well enough to play that long game, in fact to play a longer game than anybody else on the market. But in recent decades, so much money had gone into the stock market via retirement funds etc. that bringing in your profit over a 10-30 year period looked rather tame. Sure, there were big profit multiples in the credit card business, but it takes time for most people to run up substantial credit card debt, and the kind of people who rack up house-size debts quickly are unfortunately the sort of people who tend to pay them off too because they understand how to use credit effectively, so they are not generating any profit. And in a rising market, those long-term profits seem to have a very high opportunity cost, because although they are secured by property, I could probably double my money faster by investing it in some dot com thing, whatever that means... Meanwhile, I'm out the $500k I just gave to Joe Blow, and my competition across the street is just celebrating an IPO of clueless,com that paid off at 32:1. Damn! But wait - YOU look like a smart guy. Look, I have this mortgage on Joe Blow's house, and 99 others just like it. Houses - lovely solid assets, not like those inflationary stocks. They're even better than gold, because you can't live in a goldbrick, amirite? And who invests in gold, that's no way to make money any more, the 70s were a long time ago. I'm gonna collect $500k from Joe over the next 20 years! He'll pay because it's his house, duh. My cost of capital from the federal reserve? Cheap, they only want $100k in interest, God bless Alan Greenspan. No, you can't raise capital there, you need a banking license like I have but they're like taxi medallions, you gotta wait years to get one. But look, about this $400k profit I make after I pay the Fed off. Times 100 mortgages that I've issued, that's $40 million dollars of pure profit - and this profit is on debt secured with $50 million worth of houses...at today's prices. And they're not making any new land, heh heh! Oh, you wish you could get in on this? Yeah, too bad you don't have a banking license like me...but come to think of it, don't a lot of taxi guys rent out their cab, and everybody wins? Yeah! How about this: you give me $50 million, and I'll split the $40m profit with you, even Stevens, $20 mil each and I'll do all the hard work of collecting the payments each month and I'll hold all the risk. What's in it for me? Well, I'll issue some more mortgages, I got people trying to buy property faster than the hired help can build it. What's in it for you? $20 million my friend, and peace of mind. How long do you think this bank has been here? OK, it was more complicated than that - there was an investment bank in the middle giving the sales pitch and gift-wrapping the item, and they were getting paid a commission up front. But this was the basic transaction that both sides suckered themselves into, and on which both sides lost money while the investment bank kept its cash commission.

goatforce5 16y ago

A follow up post touches on this: http://www.npr.org/blogs/money/2010/09/24/130107647/what-does-it-mean-to-say-toxie-s-dead http://www.npr.org/blogs/money/2010/09/24/130107647/what-doe... There are different classes of bond holders within their bond fund. Toxie was a lower ranked class that was assuming more risk, and we've now reached a point where a sufficient number of mortgage holders within the bond fund have defaulted, that there will never be enough mortgage payments coming in to pay the holders of Toxie-class bonds within this fund. Other people within the fund are still getting paid. If I recall correctly from earlier Planet Money podcasts, this was part of the problem. The overall fund would receive a low-risk rating, and those parts would be bought up by the really big institutional investors. The crappier bits of the same funds would then be sold to your local teachers retirement fund or similar, bought by investors who were savvy enough to realise they were assuming more risk. (I've almost certainly got some of that wrong - someone correct me!) Regardless: listen to Planet Money - it's 12-20 minutes 3 times a week, and they make a lot of complicated stuff relatively easy to understand and accessible. http://www.npr.org/rss/podcast/podcast_detail.php?siteId=94411890 http://www.npr.org/rss/podcast/podcast_detail.php?siteId=944...

fanboy123 16y ago
This might make understanding easier. Start 100M mortgages. 100M bonds (in reality for "safety" it was more like 95M in bonds.) 80M was part of the upper class. 20M was part of the lower class. If 30M of mortgages went busto without EVER paying a single payment and houses sold were worth 20M then 100% of the lower class got destroyed. Assuming the other 70M worth of mortgage holders kept paying until principle was returned the upper class never saw a single cent of loss and the lower class never gets paid a single cent of principle or interest. It is a clever piece of financial engineering that allows risky loans to be "safe." It is also why writeoffs can be complete for the lower class even though the asset (house) is sold with a positive value.

fanboy123 16y ago

It is complicated. You are correct in that when the house is sold investors get a recovery. Not all investors are created equal though. Difference pieces of a deal were paid different interest rates (according to risk) and as such they get allocated recoveries in a specific order. If you notice Toxie stopped getting payments a few months in and is declared dead a few months afterwards. This happens when the amount of losses eats through your piece of the pie. When the house gets sold is is sold for something less than the mortgage was worth. The losses get allocated to the riskier pieces of the deal which protects the lower interest rate/more "protected" higher pieces of the deal. Also banks got bailouts which cushion them against losses but do not prevent losses. A loss on an asset is a loss on an asset. The federal reserve buying mortgage bonds was not considered a bailout per say but are helping to prop up prices which indirectly help the banks.