|
Users viewing this topic:
none
|
|
Login  | |
|
How much are subprime mortgages worth to an investor? - 10/17/2008 7:44:35 PM
|
|
|
mrtigger
Posts: 321
Joined: 4/12/2005
Status: offline
|
This is a hypothetical thing (for most of us anyway). But I thought it might be interesting to calculate what I think subprime mortgage debt is worth and hear others opinions. So my question is:
If you were an investor, how much would you be willing to pay for $1000000 (1 million $) of subprime mortgage debt?
I'd be willing to pay about $200K (about .20 on the dollar). Over a 5 year time, I think that would translate into about a 15 to 20 % return on my money.
My calculations are:
I assume about 90% of subprime mortgages will wind up as foreclosures. (Housing is continuing to decline and we have only seen a small fraction of the foreclosures that will occur during this mess...). I assume the remaining 10% of mortgages will continue to be paid at maybe about 8% interest.
After 5 years, the 10% (100K) that is performing has paid 50K in interest and is probably still worth 100K (unless interest rates go up a lot...)
The dollars I receive from the remaining 900K is whatever I can get from foreclosure sales.
My guesstimate, given that reduction in home values & the costs of foreclosure is I'd recoup about 40% of the mortgage amount from a foreclosure.
But about half the time, they cannot even find the promissory note that the borrower signed. You cannot foreclose on a house without it. So, on about half the 900K of bad debt, I could recoup nothing at all from foreclosure.
So, after 5 years, my investment would be valued at about:
$100K in performing mortgages,
$50K interest on them,
$0 from the 450K of defaulting mortgages that can't be foreclosed on.
$180K from the 450K of defaulting mortgages that are foreclosed on.
$330K total is about what I'd have after after about 5 years time.
There are too many risks & complications for me to be willing to get into that mess for less than about 15 to 20 % on my money. To get that return I would have to pay no more than about 200K for the million of debt.
So I figure subprime mortgage debt is worth about .20 cents on the dollar.
_____________________________
mr tigger
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/17/2008 8:58:35 PM
|
|
|
relady
Posts: 1209
Joined: 4/11/2005
From: Greater St. Louis Metro
Status: offline
|
The problem, as I understand it, is that the subprime loans have been packaged with the prime loans so you don't have entire packages that are defaulting. It's running around 24 out of 100 that are defaulting from the latest info I have. It could be lower or higher I guess. But you might buy 24 defaulting loans in a package where the other 76 are just fine. So how DO you price that? I guess it depends on whether you want to try and renegotiate some of those 24 loans and save some of them or not. Real estate is very cyclical. This too shall pass, and someone who has the time to hold those securities until it does pass will come out winning on the other in, IMO.
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/17/2008 10:13:04 PM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
Actual value right now depends on the FICO score, LTV, rate formula (2/1, 3/1, 5/1/ , LIBOR ARM, etc), geographic location, rate, term, delinquency history, etc....
Actual defaults are very unlikely to hit 90% - quite a number of these loans will prepay with no default. Currently, it seems most investors are assuming no more than about 60% defaults in aggregate on a worst-case basis. Of those loans, loss severities are will usually run at only 40% or so. If you take Houston in the 1980's and Boston in the 1990's as examples of highly stressed markets, loss severities typically haven't been above 40%. Roughly 50% of defaults are resolved with no loss at all.
Assume 40% of the loans pay as scheduled, 60% default with a 40% severity. Net loss is about 24%, of which some portion won't happen immediately.
Actual trading value right now is closer to 75-85 cents on the dollar. I ought to be able to confirm that on Monday.
< Message edited by GroupW -- 10/17/2008 10:27:10 PM >
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/17/2008 10:15:29 PM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
quote:
ORIGINAL: relady
The problem, as I understand it, is that the subprime loans have been packaged with the prime loans so you don't have entire packages that are defaulting. It's running around 24 out of 100 that are defaulting from the latest info I have. It could be lower or higher I guess. But you might buy 24 defaulting loans in a package where the other 76 are just fine. So how DO you price that? I guess it depends on whether you want to try and renegotiate some of those 24 loans and save some of them or not. Real estate is very cyclical. This too shall pass, and someone who has the time to hold those securities until it does pass will come out winning on the other in, IMO.
From my days of buying this stuff a few years back, pricing mixed packages is fairly easy if you have decent database skills. The idea is to bucket loans with similar risk and economic characteristics and price each bucket individually. Really not very hard at all.
Your last statement is spot-on accurate. I'd love to buy that stuff at 75 cents on the dollar.
Edit: Most of the packages out there don't really mix prime and subprime. While the total portfolio being sold might include both types of loans, they are typically grouped and marketed as separate buckets within the overall portfolio.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/18/2008 7:58:21 AM
|
|
|
Random
Posts: 974
Joined: 4/18/2005
From: Zipperhead
Status: offline
|
quote:
ORIGINAL: GroupW
Actual defaults are very unlikely to hit 90% - quite a number of these loans will prepay with no default.
That was my first thought when I read the OP as well.
_____________________________
"That which has always been accepted by everyone, everywhere, is almost certain to be false." -- Valery
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/18/2008 10:42:56 AM
|
|
|
NoShow
Posts: 454
Joined: 5/10/2005
Status: offline
|
quote:
ORIGINAL: Random
quote:
ORIGINAL: GroupW
Actual defaults are very unlikely to hit 90% - quite a number of these loans will prepay with no default.
That was my first thought when I read the OP as well.
I agree that 90% of the remaining subprime will probably not fail. We've already seen the bulk of the subprime failures.
Looking at what relady said, that the subprime are mixed in with non-subprime; there is an increasing percentage of prime loans going into foreclosure, so that should be taken into consideration in the analysis.
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/18/2008 6:33:04 PM
|
|
|
relady
Posts: 1209
Joined: 4/11/2005
From: Greater St. Louis Metro
Status: offline
|
quote:
Most of the packages out there don't really mix prime and subprime. While the total portfolio being sold might include both types of loans, they are typically grouped and marketed as separate buckets within the overall portfolio. Hmmm, did not know this. We have been told that they were mixed. Or maybe I just misunderstood the process -- which is quite likely.
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/20/2008 12:59:53 PM
|
|
|
DeeAnnBailey
Posts: 2638
Joined: 3/23/2006
From: SC
Status: online
|
subprime and prime are seldom a package. If there is proper due diligence to determine the actual worth, most are worth $0.50 on the dollar. Some more because the lender did not go 'deep' into the 'subprime pot'. Many lare worth ess because those making the loans did not verify income, primary house vs rental house, etc.
_____________________________
D. Ann Bailey
My Blog Dee's Delights and Delusions
<<<<<<The love of my life - precious Erin!
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/21/2008 12:06:19 PM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
DeeAnn-
Curious as to how you arrived at your figures. In theory, 50 cents is about the bottom of what I would expect even a no-doc loan to trade. Even on a non-performing pool that is 100% defaulted balances, you typically see prices in excess of 50 cents on the dollar. If a home is priced near 100, and you borrowed $90 to fund the purchase, if the mortgage goes belly up, you own the house at a $90 price. Assuming a 50% loss severity (more than we typically see even in a stressed environment), the proceeds at recovery are $45. If it takes a year to resolve, you would price that back by 20% for your cost of equity. That's $45 less $9, or a $36 price - rock bottom. You'd pay more than that for lower LTV loans, performing loans, non-performing loans in stable markets, or loans that you could offer discounted payoffs for.
Naturally, this all assumes the pool is 1st mortgages. HELOCs etc would trade significantly lower.
Talked to a trader friend of mine at a major Wall street firm - right now he's saying he hasn't seen a performing portolio actually trade in a couple of months, so any talk about price and value is something of a ****shoot.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/22/2008 2:08:50 PM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
Makes sense then if you account for a high portion of seconds in the pricing. Obviously 1sts with documentation defects can be lower as well.
We're in the same line of business. I was buying subprime loans in '98-99 when the market needed liquidity. We were happy to provide it - for a price. 
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/24/2008 10:41:21 AM
|
|
|
Row1
Posts: 249
Joined: 12/2/2005
Status: offline
|
quote:
Roughly 50% of defaults are resolved with no loss at all.
-Except for opportunity lost / opportunity cost. Your money was tied up with them, wating for them to straighten out, while you could have been doing something else with your money.
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/25/2008 12:14:26 AM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
quote:
ORIGINAL: Row1
quote:
Roughly 50% of defaults are resolved with no loss at all.
-Except for opportunity lost / opportunity cost. Your money was tied up with them, wating for them to straighten out, while you could have been doing something else with your money.
Actually, that's quite not right. Lost interest is included in the recovery amount. On somewhere around 50% of the loans, the value of the property is sufficient to cover both the debt as well as the lost interest.
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
|
RE: How much are subprime mortgages worth to an investor? - 10/25/2008 12:16:34 AM
|
|
|
GroupW
Posts: 2863
Joined: 11/16/2007
From: Up in the hills of Colorado (very BIG hills...)
Status: offline
|
FYI - Finally heard back from my trader friend on the street. Depending on vintage,LTV, FICO, geographic distribution etc., performing subprimes are current trading at 65-85 cents on the dollar. '07 vintage loans in CA at the lower end of that range, more seasoned loans in more stable regions at the higher end.
BT
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
|
|
|
|
 New Messages |
 No New Messages |
 Hot Topic w/ New Messages |
 Hot Topic w/o New Messages |
 Locked w/ New Messages |
 Locked w/o New Messages |
|
 Post New Thread
Reply to Message
Post New Poll
Submit Vote
Delete My Own Post
Delete My Own Thread
Rate Posts |
|
|
Forum Tools
Printable Version
