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Feeds for ED FRANklINS CASH FLOW NOTE SALES [Sell your cash flow or promissory notes now ]

1. Cash Flow note Demographics
ED FRANKLIN’S cash flow note sales get cash now Different Demographic, Better Results As explained in the last issue, seller financing can be an extremely useful option to sell a house in a slow real estate market. Unconventional private lending is a great way to increase the overall sales closing ratio. When the property owner is willing to "carry back" a note, it is often possible to obtain a higher selling price and reduce the time needed to find a buyer. Plus, creating a note secured by real estate can give the seller a steady, interest-generating income stream for their long-term future. The Challenge: A Different Demographic Home owners who are ready to offer a private loan in order to sell their houses are still faced with a stumbling block: how to find buyers in need of seller financing. Most property owners don.t have any experience in finding individuals interested in buying a "high ticket" item like a home directly from the owner. When property sellers work within the established real estate agent process to find buyers and close a deal by "traditional" methods, it is generally safe to assume that the vast majority of these customers will qualify for bank financing. In order to pursue private seller financing to sell a home, however, a property owner will need to attract home buyers who do not have adequate credit to buy real estate - a significantly different demographic. The key to successfully orchestrating a seller-financed real estate deal is getting the right buyers through the door - just like a traditional property sale. In order to get motivated buyers interested, the seller will need to use a targeted marketing technique designed specifically for the "unconventional buyer's market". The most effective advertising method to tap into this distinctly separate pool of buyers is surprising to some. Unconventional Marketing The seller's best strategy for finding their credit-challenged buyers would be to list the property in places that are frequented by individuals that do not have a real estate agent. The newspaper is one of the best places to start putting out the word. The majority of home buyers looking for seller financing start by searching the "For Sale By Owner" ad listings in the local paper. Seller financing originated and took off via this print medium. Even in today's Internet-dominated business world, newspaper advertising continues to be an effective means to reach those looking for seller financed deals, so it makes sense to start the advertising here. A simple sale ad including the line "seller financing available" or "credit issues OK" should help to generate genuine interest from the right potential candidates. Orchestrating the Deal Once interested buyers start coming around, the seller can choose to work with the party that brings the most to the closing table in terms of the down payment. Of course, larger down payments are better than smaller amounts, but it is entirely up to the property seller to decide what is acceptable. Once the details of the initial payment, payment term, interest rate, and any necessary clauses are established, the buyer and seller could create a new seller-financed note. If the seller needs money immediately to pay their down payment, the note terms can be specifically tailored to ensure that it's attractive to cash flow buyers. Once the newly-created note is sold, the property seller will have "cashed in" their future monthly payments for an immediate lump sum of cash. The details of the note creation are easily handled with standardized boilerplate or the assistance of an attorney; some note sellers are able to manage the sale of their home without any paid legal counsel at all. In fact, once the seller understands the potential advantages of seller financing and takes the proper steps to market the property to the target buyers, the final steps in cementing the note deal are usually much easier than expected. Click Here For More Information Hyperlink Text

2. Seller Financing to the Rescue
Seller Financing to the Rescue The Problem When it comes to selling real estate, one of the most difficult and frustrating situations for sellers is when market conditions make it nearly impossible to sell at the desired price point. A high initial listing price might be because the seller simply has an unrealistic idea of how their house stacks up against the competition in the area, or because the owner needs to sell for a set minimum price in order to pay off their loan against the property. With traditional property sales methods, the only way to prevent the property from sitting on the market indefinitely is to keep dropping the price. Unfortunately, this technique doesn't always work - especially if the seller is unwilling to "discount" their house by much. In areas flooded with homes for sale, reducing the asking price slightly will not bring the desired result. In fact, it's common that the property will continue to sit on the market without offers, alongside the multitude of other unsold properties with similarly reduced prices. Anyone experienced in sales understands that making your product stand out from the crowd is a critical technique for success. But if there's too much competition offering the same attributes, the only logical way to attract the attention of serious buyers is to drop the price so that your property is a much better value than the competition. In cases where the seller is too inflexible with their asking price, this is not a practical solution. Without an alternative strategy, the seller is forced to keep the house on the market for an extended period of time with an unrealistic asking price, hoping for the right buyer to come along. And as you know, that "Mr./Mrs. Right" might NEVER materialize! The Seller Finance Solution Property sellers who want to both obtain their desired price and close on the deal quickly should consider seller financing. Seller financing is a powerful tool to remedy real estate situations that otherwise look grim. Many home sellers (and their real estate agents) do not see seller financing as a viable option. In actuality, seller financing can bring new attention to the listing and invite a different group of potential buyers - thereby opening up a unique, untapped market. A large percentage of people throughout the country cannot get approved for bank funding to buy real estate because of their credit situation. Many of these people are still in the market to buy a house, however. The "credit-challenged" are often frustrated with the limitations of apartment living or being renters; as a result, many are willing to pay a higher price just for a chance to get seller financing and improve their quality of life. A savvy property seller who recognizes this opportunity can salvage an unfavorable situation and turn it into a bonafide seller's market. By using this type of creative financing, the seller could actually end up getting more than the original asking price - without resorting to the questionable strategy of patiently waiting for the "right buyer". Seller finance can enable homeowners to receive a favorable selling price despite bad market conditions. In addition, the real estate agent (if any) gets to close a deal and move on to other sales, while a home buyer with poor credit is able to become a home owner. It's one of those rare situations where everyone at the negotiating table gets what they want. Paper Tigers Many home sellers never consider seller financing because they don't understand the benefits. There are also common misconceptions that it's much too complicated to attempt to orchestrate a seller financed deal, or that there are no buyers willing to sign a private note. Once a property seller takes the time to learn about the basic process, the advantages of offering financing instead of a lower price to sell their property become very clear. Plus, a little education about seller finance will make it apparent that drafting a secured private note is actually a very straightforward process. The bottom line is seller financing can enable a home owner to "have their cake and eat it too" - i.e., sell at the desired price, close the deal quickly, and even receive additional income from interest payments as well. Click Here For More Information Hyperlink Text

3. Sell Bad Mortgage Dept
Mortgage-Backed Securities Home | Previous Page Mortgage-Backed Securities Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization Ginnie Mae, backed by the full faith and credit of the U government, guarantees that investors receive timely payments Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U government, have special authority to borrow from the U Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as "private-label" mortgage securities Mortgage-backed securities exhibit a variety of structures The most basic types are pass-through participation certificates, which entitle the holder to a pro-rata share of all principal and interest payments made on the pool of loan assets More complicated MBSs, known as collaterized mortgage obligations or mortgage derivatives, may be designed to protect investors from or expose investors to various types of risk An important risk with regard to residential mortgages involves prepayments, typically because homeowners refinance when interest rates fall Absent protection, such prepayments would return principal to investors precisely when their options for reinvesting those funds may be relatively unattractive You can learn more about mortgage securities by visiting the website of The Securities Industry and Financial Markets Association Staff of the Department of the Treasury ("Treasury"), the Office of Federal Housing Enterprise Oversight ("OFHEO"), and the Securities and Exchange Commission (the "Commission") formed a joint task force ("Task Force") in August 2002 to conduct a study of disclosures in offerings of mortgage-backed securities ("MBS") The purpose of the joint study was to evaluate current disclosure practices and consider whether disclosure enhancements are desirable in assisting investors to make informed investment decisions In conducting the study, the Task Force reviewed the history and development of the MBS markets, the current disclosure requirements for these securities, and market-driven industry disclosure practices and standards The Task Force also interviewed a variety of MBS issuers and investors, and other experienced market participants and observers, which provided the Task Force with additional perspectives about the evolution of the MBS markets, including changing disclosure standards The Task Force received recommendations concerning changes to current disclosure standards based on investor needs, and assessments as to the likely impact of additional disclosure on the MBS markets' continued smooth functioning and liquidity This report contains the Task Force's findings, conclusions, and recommendations regarding enhanced MBS disclosures Privately owned financial institutions have become increasingly important as issuers in the so-called "private-label" market The MBS markets are estimated to have grown by more than 800% in the past two decades MBS investors continue to be almost exclusively institutional, but their expressed needs have changed with the evolving market and economic conditions In recent years, investors have focused much more time, attention and resources on the evaluation of prepayment risk and, in the case of private label MBS, credit risk Market participants interviewed by the Task Force indicate that the changes have been considered beneficial to the market In interviews with the Task Force, MBS market participants also agreed, almost without exception, that the significant changes in disclosure did not affect the highly liquid nature of the GSE and Ginnie Mae pass-through and to-be-announced markets, and MBS markets generally operate reliably and efficiently Yet, the Task Force also found that most market participants with whom it spoke, as well as most lenders and non-GSE issuers, believe the MBS markets could function better with additional pool-level disclosure Moreover, consistent with their past experiences with changes in disclosure, these market participants expressed confidence that additional pool-level disclosures would not have a significant adverse effect on the markets' liquidity Based on the study, the Task Force has concluded that additional pool-level disclosures would be both useful and feasible Market participants interviewed by the Task Force were clear in suggesting additional information that they believed would be useful This report sets forth and describes the most frequently mentioned information that market participants recommended be disclosed to supplement currently disclosed information Examples of additional disclosure items that market participants suggested would present few practical obstacles are:loan purpose; The Task Force believes there are no significant obstacles to the introduction of these additional pool-level disclosures and that the benefits of enhanced transparency would ultimately outweigh any costs To implement additional disclosures, the Task Force recommends that investor interest and issues of practicality should be key criteria used to determine the specific items for additional disclosure in the MBS markets, as well as the appropriate timing and method of providing this additional disclosure In the past, industry groups and other market participants have stepped forward to coordinate and implement additional disclosures in the MBS market The Task Force encourages a continuation of this approach at this time If market forces are unable to reach consensus on disclosure enhancements, the agencies represented on the Task Force will need to consider what additional action might be appropriate In addition to its review of MBS disclosures, the Task Force inquired about allegations of selective MBS selling and purchasing practices arising from possible information imbalances among market participants The Task Force looked at policies and procedures regarding information barriers at the GSEs In addition, OFHEO reviewed OFHEO examination reports and inquiries of the GSEs as to specific allegations Though questioned by the Task Force about such allegations, interviewees provided no evidence to substantiate allegations of improper activity The Treasury, the Commission, and OFHEO will, in their separate capacities, continue to monitor the MBS markets to assess the implementation and potential impact of enhanced MBS disclosures If future developments warrant, the Task Force members, in their separate capacities or jointly as they agree appropriate, could consider what additional steps might help provide additional, useful disclosures to MBS investors and market participants In July of 2002, Treasury, OFHEO and the Commission made a joint announcement regarding the intention of Fannie Mae and Freddie Mac to voluntarily register their common stock under the Securities Exchange Act of 1934 (the "Exchange Act") This voluntary registration, when in place, will trigger periodic disclosures regarding the GSEs Treasury, OFHEO and the Commission also indicated they would review disclosure requirements and practices in the MBS markets, which would not be affected under this voluntary registration initiative The purpose of the review on primary offering disclosures for MBS, which culminated in this report, was to examine disclosures to all investors in these securities, with a view to enhancing the availability of information that investors should have to evaluate the securities in the MBS markets and make investment decisions Staff from Treasury, OFHEO and the Commission, acting as the Task Force, have conducted the review of the disclosure practices in the MBS markets The Task Force reviewed regulatory disclosure requirements and current industry disclosure practices The Task Force also interviewed Fannie Mae, Freddie Mac and Ginnie Mae, private-label issuers, institutional investors, dealers, individual analysts, MBS market and real estate finance trade groups, pension funds and others involved in the markets to hear their views ranging from evaluations of current markets, how the markets function and particular concerns regarding disclosures As background to the Task Force's findings, the report discusses the development and operation of the MBS markets, the various market participants, and the types of MBS sold The report also addresses current disclosure practices and investor interest regarding the assets of and structures used for the securitization vehicles, credit and repayment sources and other risks affecting the repayment and value of the MBS, and information imbalance issues Finally, the report notes categories of information that the Task Force believes would enhance disclosures in the MBS markets Growth in the MBS markets has been significant over the past 20 years For example, single-family MBS grew from less than $367 billion outstanding in 1981 to more than $3 In order to understand the reasons for evaluating disclosure practices in the MBS markets, it is helpful to understand the development and operation of the MBS markets As described in this section, the MBS markets consist primarily of the MBS issued or guaranteed by two government-sponsored enterprises, Fannie Mae and Freddie Mac, and one United States-owned corporation, Ginnie Mae MBS are also issued by private-label issuers, which are private institutions The GSEs and Ginnie Mae guarantee payments on their respective MBS, whereas private-label issuers use various forms of credit enhancement The most commonly issued MBS are pass-through securities, which consist almost entirely of GSE and Ginnie Mae MBS, and REMICs, which are the primary security issued by private-label issuers The MBS investor base has evolved, but remains largely institutional The most important risks in the MBS market are prepayment risk and credit risk This section includes a discussion of how these risks drive disclosures in the MBS markets Other sections of this report discuss whether MBS disclosures can be enhanced Fannie Mae, Freddie Mac, and Ginnie Mae were all created by federal law to address perceived deficiencies in the U The GSEs and Ginnie Mae enhance liquidity by enabling lenders and originators to sell their mortgage loans and use the proceeds from the sales to make new mortgage loans Fannie Mae was originally authorized only to buy FHA insured loans After being split into two entities in 1968, Fannie Mae and Ginnie Mae, Fannie Mae was authorized to buy a broader range of loans Freddie Mac was initially authorized to purchase conventional mortgages from federally insured financial institutions Both Fannie Mae and Freddie Mac are now investor owned companies, and the common stock of both companies is traded on the New York Stock Exchange Ginnie Mae does not buy or sell loans or issue MBS; instead, it guarantees payment on MBS that are backed by federally insured or guaranteed loans, mostly loans insured by the FHA and guaranteed by the Department of Veterans Affairs (the "VA") Other guarantors or insurers of loans eligible as collateral for Ginnie Mae MBS include other offices in the Department of Housing and Urban Development ("HUD"), and the Department of Agriculture's Rural Housing Service Ginnie Mae is a wholly-owned government corporation under the auspices of HUD Private-label issuers include commercial banks, savings associations, mortgage companies, investment banking firms and other entities that acquire and package mortgage loans for resale as MBS The types of investors in MBS have changed over time Initially the primary purchasers of MBS were thrift institutions, commercial banks, insurance companies, pension funds, and mutual funds More recently Fannie Mae, Freddie Mac, and international institutions have also become much more active market participants Investments in MBS are made for a variety of reasons Some investors purchase MBS to hold long-term in portfolios while others purchase for short term trading purposes MBS are also widely used for hedging purposes Much of the development of GSE, Ginnie Mae, and private-label MBS markets has been in direct response to investor interests and demands The MBS market as we know it today can be traced back to 1970, when Ginnie Mae first guaranteed a pool of mortgage loans The creation of Freddie Mac in 1970 helped to expand the market In the basic MBS structure, a group of mortgage loans is sold to a trust or other investment vehicle In the case of residential home mortgages, the pools usually include a large enough number of loans so that information on no one loan is important in analyzing the pool The investment vehicle owns the mortgage loans, issues securities that are either backed by or represent interests in the loans, and makes payments to investors out of the payments made on the loans A servicer is hired to collect the mortgage payments from the borrowers and to pass the payments, less fees, including guarantee and trustee fees, through to the trustee, who passes these payments on to the investors that hold the MBS To facilitate sales of MBS, the GSEs and Ginnie Mae are authorized to guarantee the MBS Thus, if for some reason, there is insufficient money to cover the payments due on the MBS, the GSEs make the payments due on the MBS Ginnie Mae's guarantee arises if the issuer (typically the loan originator) does not make the delinquent payments to the MBS holders Unlike Fannie Mae and Freddie Mac, which are permitted to issue, as well as guarantee the payments on, MBS, Ginnie Mae only guarantees the payment of MBS that are created by private entities Ginnie Mae's guarantee of the payment of MBS is backed by the full faith and credit of the United States, whereas the guarantee obligations of Fannie Mae and Freddie Mac are not There are significant differences in the composition and structure of typical private-label MBS compared to MBS issued or guaranteed by the GSEs or Ginnie Mae The perceived strength of the guarantees, the evolution of tax law, and the demands of investors in an increasingly complex marketplace have contributed to current practices and product distinctions between GSE and Ginnie Mae MBS and private-label MBS A number of regulatory and tax constraints initially impeded private entities from expanding into the MBS market created by the GSEs and Ginnie Mae Many of the regulatory constraints affecting private entities were removed in 1984 with the passage of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") SMMEA was intended to encourage private sector participation in the secondary mortgage market by, among other things, relaxing certain regulatory burdens that affected the ability of private-label issuers to sell their MBS Tax law constraints also affected the types of MBS that could be sold Until the passage of the Tax Reform Act of 1986 ("1986 Tax Act"), which recognized the Real Estate Mortgage Investment Conduit ("REMIC") structure with its beneficial tax treatment, most MBS were sold as "pass-through" securities As discussed below, pass-through securities pay an investor principal and interest received from payments on the mortgage loans that are the assets of the trust The payments on the mortgage loans are passed through the trust to the investors as they are made Before 1986, the effect of the limitation on activity of grantor trusts under the tax laws restricted the use of trusts with multiple classes of securities with differing payment characteristics In the multi-class structure, the principal and interest payments are not just passed through pro rata as paid to all investors, but rather are divided into varying payment streams to create classes with different expected maturities, different levels of seniority or subordination or other differing characteristics Prior to 1986, the tax law treated these multi-class trusts as associations taxable as corporations, and distributions would have been taxable at the trust level and also at the trust investor level This "double taxation" made multi-class structures generally unfeasible The 1986 Tax Act eliminated the double taxation for multi-class vehicles structured as REMICs With the advent of the REMIC, more complex structures with multiple classes were developed which divided up the payment streams on the mortgage loans that were collateral for the securities repayment obligations to investors There are differences between the GSE and Ginnie Mae MBS and private-label MBS in the composition of the mortgage loans comprising the collateral for the respective pools The types of underlying mortgage loans that are eligible to be included in GSE and Ginnie Mae MBS affect the composition of pools backing private-label MBS because originators can generally receive the best price for eligible loans in GSE and Ginnie Mae transactions Because the GSEs require a higher fee to accept some loans of lesser credit quality, sometimes originators may find a private-label transaction more attractive The mortgage loans included in Fannie Mae and Freddie Mac MBS generally have the following characteristics:mortgages are on residential properties, most commonly one to four family homes (these are referred to as single family loans); mortgages are generally 15 year and 30 year maturities that are fully amortizing;16 the loans are due on sale of the underlying property and cannot be assumed by the buyer of the property;18 mortgage loans must be within the "conforming loan limit", which for one-unit homes in 2003 is $322,700 loans within the conforming loan limit generally satisfy other GSE specifications for loan documentation, credit information and property type, among other requirements There are some mortgage loans made to borrowers with good credit histories that are within the conforming loan limit but do not satisfy all the standard GSE underwriting guidelines, including documentation, for mortgage loans These mortgage loans are called "Alternative A" or "Alt A" loans These Alt A loans fail to satisfy the GSE guidelines for reasons such as limited or low documentation of income from the borrower (for reasons of speed or convenience to the borrower), unstable income sources, higher loan-to-value ratios ("LTV") or other ratios of payments to income Alternative A loans and some lower credit quality loans that are within the conforming loan limit can be swapped for Fannie Mae or Freddie Mac MBS or pooled and sold as private-label MBS Fannie Mae or Freddie Mac will issue MBS backed by such loans if the lender pays a higher guarantee fee that compensates the GSE for the potentially higher risk Apart from Alt A loans, there are other types of mortgage loans that do not satisfy standard GSE requirements Mortgage loans that are larger than the conforming loan limit, called jumbo loans, cannot, by statute, be included in GSE or Ginnie Mae MBS pools Mortgage loans are also made to borrowers who fail to meet GSE underwriting requirements because of certain borrower or loan characteristics For example, mortgage loans made to borrowers with poor credit histories or high debt-to-income ratios may be ineligible for securitization by the GSEs or eligible only by payment of a higher guarantee fee These are the types of loans that typically comprise the pools backing the private-label MBS Under the Ginnie Mae MBS program, HUD-approved mortgage originators pool FHA, VA or certain other federally-insured mortgages into MBS and sell the MBS guaranteed by Ginnie Mae The terms of the underlying mortgage loans must comply with the underwriting requirements of the FHA or VA, as applicable As a result of the GSE underwriting criteria and conforming loan limits and FHA and VA underwriting requirements which do not apply to private-label issuers, the mortgage loans in private-label MBS generally have more diverse collateral, credit risk or other underwriting characteristics than GSE or Ginnie Mae MBS and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics Private-label pools more frequently include second mortgages, high loan-to-value mortgages and manufactured housing loans The coupon rates and maturities of the underlying mortgage loans in a private-label MBS pool may vary to a greater extent than those included in a GSE guaranteed pool As noted above, the GSEs and Ginnie Mae guarantee payments to investors on their MBS This guarantee ensures that investors receive scheduled payments of principal and interest, regardless of whether payments on the underlying mortgages are made MBS issued in the private-label market are typically not guaranteed by the issuer and instead rely on other forms of credit enhancement or support to give investors greater assurance they will receive payments on their MBS The credit enhancement in private-label MBS may be internal or external to the vehicle issuing the security External credit enhancements generally involve insurance or a letter of credit purchased by private-label issuers to support the underlying mortgage payments The most common credit enhancement currently used in private-label MBS is the senior-subordinated structure in REMICs In the senior-subordinated credit enhancement, the trust will issue different classes of securities There will be a senior class or tranche and at least one class that has a subordinated right of payment to the senior class The senior class, which bears the least amount of risk of default of the underlying mortgages, will carry a lower interest rate The subordinated class, which bears the greatest amount of risk of default of the underlying mortgage loans, will carry a higher interest rate in order to compensate for the greater risk exposure The level of credit protection this structure provides to the senior class may decline over time due to prepayments and thus other mechanisms, such as prepayments going disproportionately to the senior class (known as shifting interest structures), must be in place to provide further safeguards The most significant feature and risk that all MBS share is prepayment risk, which is the risk that principal payments on an underlying loan will be paid earlier or later than expected Unscheduled prepayments may affect the return realized by MBS investors When an investor purchases an MBS or any other fixed income security, the investor does so with the understanding that the price he or she is paying for the security reflects uncertainty about its expected life Prepayment risk on MBS is influenced by a wide range of factors that relate both to general market conditions, including interest rates, and the performance on individual loans included in the portfolio of loans backing an MBS issuance As interest rates fall below rates on existing mortgages, borrowers may, and commonly do, prepay their existing loans and refinance at lower rates Refinancings are recognized as being the primary driver of prepayments Most mortgage loans must be paid in full when a home is sold The mortgage loan can also be paid prior to its due date or maturity if the homeowner does not pay the loan and the lender repossesses or forecloses on and sells the home Finally, a borrower may prepay a loan, in whole or in part, at any time for any other reason When MBS prepay as a result of borrower refinancing, investors seeking to reinvest in the fixed income market will generally be forced to make a new investment in a lower interest rate environment When prepayments are slower than expected, it often means that interest rates have risen The security pays later than expected, and the investor cannot take advantage of more attractive investment opportunities with those funds The potentially significant risk to investors in private-label MBS that is generally thought by investors to be less significant in the case of GSE and Ginnie Mae MBS is credit risk Investors in MBS, as with other fixed income instruments, evaluate the risk of whether they will receive the scheduled payments of principal and interest on their MBS Credit risk reflects the risk that the borrowers on the underlying loans may not be able to make timely payments on the loans or may even default on the loans In the absence of a guarantee or external credit enhancement, MBS investors generally can look only to the assets or collateral of the trust, the underlying mortgage loans, as the source of payments on their securities and to the structure of the transaction for any internal credit enhancement The creditworthiness of the underlying borrowers becomes significantly more relevant in private-label MBS offerings because there is seldom an entity that is guaranteeing the payment of the securities Therefore, if the borrowers do not pay the mortgage loans, the MBS securities will not pay, absent some credit enhancement Consequently, GSE and Ginnie Mae MBS and the private-label MBS may pose differing degrees of risk for investors Since the GSEs and Ginnie Mae guarantee the timely payment of principal and interest on the MBS, a GSE and Ginnie Mae MBS investor looks to the GSEs and Ginnie Mae to determine the credit risk Ginnie Mae's guarantee is the full faith and credit guarantee of the United States In contrast, Fannie Mae's and Freddie Mac's guarantees are based solely on their own credit quality Fannie Mae and Freddie Mac provide extensive corporate disclosure and will soon register their common stock under the Exchange Act, subjecting the two companies to all of the disclosure requirements of the federal securities laws Investors in Fannie Mae and Freddie Mac MBS may look to these disclosures to assess those companies' abilities to fulfill the guarantees of the MBS Investors may also look to information provided by OFHEO about the GSEs' creditworthiness, including results of examinations and risk based capital stress tests In addition to assessing the credit quality of the underlying mortgage loans, investors in private-label MBS must look to the creditworthiness of the provider of the external credit enhancement or must evaluate the reliability of the transaction structure to provide any internal credit enhancement and the reliability of a rating agency's rating The amount of disclosure private-label issuers must provide with respect to third party credit enhancements varies with the type and level of support expected Private-label issuers are required to discuss in their registration statements the material terms of any credit enhancement, whether internal or external and to provide information regarding the credit enhancer, insurer or guarantor As noted above, the most common form of private-label MBS is in the form of a REMIC The other common form of MBS is the pass-through security, which is used predominantly by the GSEs and Ginnie Mae The most common type of MBS is a pass-through security backed by a pool of single-family mortgage loans Generally, pass-through MBS are created by pooling or packaging mortgage loans together in a trust or other collective investment vehicle and selling the interests in the trust All payments on the underlying mortgage loans, including principal, scheduled interest, and unscheduled prepayments are passed through, on a pro rata basis, to the holders of the pool interest or participation certificates after deducting the servicing fees, Ginnie Mae and GSE guarantee fees, and trust expenses The assets of the trust or other vehicle are the mortgage loans in the pool Most pass-through vehicles own fixed rate mortgages, although adjustable rate mortgages may also be assets of a pass-through MBS entity The interest differential is used to pay for the guarantee fee to one of the GSEs and the servicing fee to the servicer Generally, the underlying mortgage loans are serviced by the originating lender or another institution that has bought the servicing rights Private-label issuers can, but in most cases do not, issue pass-through securities In a private-label MBS, the interest differential would be used to pay for credit enhancement or credit support, the servicing fee to the servicer, and trust expenses As previously noted, the REMIC is a multiple-class security vehicle that does not have the burden of double taxation The assets underlying the REMIC securities can be either other MBS or whole mortgage loans The assets are pooled and cash flows from the assets are distributed to the various REMIC security classes according to the priorities specified in advance The REMIC structure allows issuers to create securities with short, intermediate and long-term maturities This flexibility enables issuers to expand the market for the MBS to fit the needs of a variety of investors, not just investors looking for 30-year fixed-rate securities The REMIC structure has allowed for a broader group of investors REMICs may also be used to address particular investment objectives or concerns about prepayment risk by carving up principal and interest payments on the underlying mortgage loans to create different timing and levels of payments on the securities REMICs are issued by private-label issuers and under the GSE and Ginnie Mae programs The GSEs then guarantee the payment obligations on the REMIC securities In the Ginnie Mae REMIC program, Ginnie Mae guarantees the timely payment of principal and interest on each of the classes Due to the widely diverse coupon and payment characteristics of the underlying mortgage loans, most private-label securities are structured as REMICs The GSE participation in the REMIC market has effectively priced most potential private-label REMIC securities backed by conforming loans out of the market This is because, as a result of the GSE or Ginnie Mae guarantee, investors will likely pay more for GSE and Ginnie Mae securities backed by the same loans, even though guarantee fees are paid from the pool cash flows In a standard REMIC structure, known as sequential pay, each class or tranche of the security is generally paid the coupon rate on a monthly basis Principal is paid on the regular classes in sequential order: senior classes are paid first, and then the subordinated classes Any prepayments are allocated in the same way The effect of prepayments is that more senior classes may be paid off much sooner or later than anticipated Prepayments to senior classes can also shorten the expected maturities of later maturity classes in a sequential pay structure, but later maturities have less prepayment risk than exists for securities in a pass-through structure GSE and Ginnie Mae MBS are created through a variety of programs A mortgage originator selects a group of mortgage loans that it determines to sell to one of the GSEs as a package Under the "swap" programs, the lender selects and pools a group of conforming mortgage loans that meet the GSE underwriting standards and "swaps" them for MBS issued and guaranteed by one of the GSEs representing interests in that same pool of mortgages Under their "cash" programs, Fannie Mae and Freddie Mac take whole mortgage loans and give the originators cash back Subsequently, the GSE will decide which mortgages out of the pools it has purchased in the cash program to pool and use as collateral for new GSE MBS or whether to hold the mortgage loans as an investment The GSE will then issue MBS backed by the loans it has purchased from lenders or originators, guarantee the timely payment of principal and interest on the securities and sell the MBS through dealers The mortgage originator, not the GSE, decides whether to swap the loans for MBS or to receive cash A small amount of Fannie Mae and Freddie Mac MBS are created through their respective "cash" programs, with the vast majority being created through their respective "swap" programs The loan originator, of course, would also be free to use the loans in a private-label MBS issuance Under the Ginnie Mae MBS program, a HUD-approved mortgage loan originator pools FHA, VA or certain other federally-insured mortgages and sells MBS guaranteed by Ginnie Mae Ginnie Mae does not issue securities or own the underlying assets but rather guarantees the payment of the securities backed by the underlying mortgage loans or mortgage pools Like the loans in the Fannie Mae and Freddie Mac swaps, the loans in the mortgage pools comprising Ginnie Mae guaranteed MBS are chosen by the lender, not by Ginnie Mae The GSEs have other MBS products that are either larger pass-through structures, which can be pools of pools (small balance pools consolidated into one larger pool) or are collateralized mortgage obligations such as REMICs In addition to the differences in the collateral and structures discussed above, private-label MBS are sold to investors through different market mechanisms than are GSE and Ginnie Mae MBS Most pass-through MBS of each of Fannie Mae, Freddie Mac and Ginnie Mae are eligible to be sold in the "to-be-announced" or TBA market, which is essentially a forward or delayed delivery market The TBA market allows mortgage lenders essentially to sell the loans they intend to fund even before the loans are closed This also allows the lender to lock in an interest rate for the borrower The lender, or other market participant, will enter into a forward contract to sell MBS in the TBA market, promising to deliver MBS on the settlement date sometime in the future In the TBA market, GSE and Ginnie Mae MBS are traded on a forward or delayed delivery basis with settlement up to 180 days later The actual mortgage pools comprising the MBS are not specified at the time of sale In fact, many of the mortgage loans may not even be signed (and the mortgage pools created) at the time of sale The largest volume of trading in the TBA market is for settlement within 30 days In a TBA trade the seller and buyer agree to five pieces of information before entering into the transaction: the type of security, which will usually be a certain type of Fannie Mae, Freddie Mac or Ginnie Mae program and type of mortgage (i , GNMA 30-year pass-throughs); coupon or interest rate; face value (the total dollar amount of MBS the purchaser wishes); price; and settlement date The purchaser will contract to acquire a specified dollar amount of MBS, which may be satisfied when the seller delivers one or more MBS pools at settlement Forty-eight hours before settlement, the seller specifies or allocates the identity and number of mortgage pools by the specific pool numbers and CUSIPs to be delivered to satisfy the TBA trade The Bond Market Association, a private trade association of dealers in debt securities, publishes guidelines governing the mechanics of trading and settling MBS, which are intended to implement standard industry practices The guidelines, titled "Uniform Practices for the Clearance and Settlement of Mortgage-Backed Securities and Other Related Securities," contain specific guidelines for trading and settling GSE and Ginnie Mae pass-through MBS in the TBA market, known as Good Delivery Guidelines The Good Delivery Guidelines set forth the basic characteristics that GSE and Ginnie Mae pass-through MBS must have to be able to be delivered to settle an open TBA transaction Most newly issued GSE and Ginnie Mae pass-through MBS are eligible to be sold in the TBA market Already outstanding GSE and Ginnie Mae pass-through MBS may also be used to cover a TBA trade Therefore, the mortgage originator has until 48 hours before the settlement date to decide whether to use new pools of mortgages or to buy outstanding GSE or Ginnie Mae MBS to cover the trade The Task Force understands that roughly 75% of GSE and Ginnie Mae MBS are eligible to trade in the TBA market The Good Delivery Guidelines were developed as a result of the unique nature of the GSE and Ginnie Mae MBS market The TBA market developed in response to the demands of market participants for more liquidity in trading GSE and Ginnie Mae MBS In order for the market to work on a delayed delivery basis, with sales of GSE and Ginnie Mae MBS occurring before the underlying mortgage loans close, and to account for the potential that not all commitments for mortgage loans will close (called pipeline risk), the market had to develop a process that would allow the identification of the securities that would be delivered in satisfaction of a trade a very short time before settlement, rather than at the time the forward trade was entered into In addition, because there are over 1 million individual GSE and Ginnie Mae MBS, with huge variations in outstanding principal amount, it was recognized that it was impractical and inefficient, and would greatly limit liquidity, and generally reduce price, to attempt to trade these GSE and Ginnie Mae MBS on a pool-by-pool basis Thus, it was essential to establish a concept of fungibility or interchangeability among pools that would facilitate both forward trading and an orderly and liquid trading market in GSE and Ginnie Mae pass-through MBS As a result of the GSE and Ginnie Mae standardized underwriting guidelines for single-family mortgages and the trading and settling parameters of the Good Delivery Guidelines, GSE MBS that may be delivered to satisfy a TBA trade will have similar characteristics The mortgage loans underlying GSE and Ginnie Mae pass-through MBS are pooled together according to similar characteristics that are based on guidelines established by the GSEs and Ginnie Mae and enable the pools to satisfy the Good Delivery Guidelines The TBA market functions on the premise that even though each pool that will be created is unique, all pools eligible for delivery on a given TBA trade are equivalent in their characteristics and expected performance Therefore, any distinct characteristics of the underlying mortgage loans comprising a pool delivered in a trade are considered to blend together so that the MBS they back can be considered a generic security As a result, TBA market participants consider MBS of Fannie Mae, Freddie Mac and Ginnie Mae that meet the Good Delivery Guidelines to be interchangeable or fungible with other such MBS issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, respectively TBA trading vastly improves the liquidity of TBA-eligible pass-through MBS Market participants have noted that the fungible nature of TBA securities promotes broad liquidity, which adds to efficiencies in pricing, execution, delivery and settlement In addition, the TBA market allows lenders to finance mortgages, thereby locking in interest rates, prior to the actual closing of a mortgage Using TBA forward sales to hedge pipelines is more efficient and has probably resulted in lower mortgage rates for borrowers In a TBA transaction, the security traded is the one that the seller can buy or obtain at the lowest cost for delivery at settlement (and thus has a higher profit potential) In other words, TBA prices are based on the GSE or Ginnie Mae pass-through MBS that are the "cheapest to deliver " Thus, the price of the cheapest to deliver security or the generic security in a TBA trade is the base price for TBA trades Because the generic security trade price is the base price for TBA trades, this price is also the floor off which other MBS trades are priced Any extra amount paid for a perceived benefit is measured relative to the base price Market participants note that the tremendous market liquidity has created pricing efficiency and reduced the bid/ask spread to 1/16 of a point or even 1/32 of a point Bloomberg LP and other third party vendors publish average daily price quotations for TBA trades, which include only generic securities There is also a competitive dealer and interdealer broker network from which daily pricing of trades in generic securities is available As described above, the Good Delivery Guidelines establish standard notification and settlement dates for GSE and Ginnie Mae MBS The trading guidelines require delivery of confirmations within one business day of the TBA forward trade The confirmation must contain information regarding the security and the transaction, including product type, coupon rate and settlement month The confirmation may contain other stipulated conditions that were negotiated as part of the trade The Good Delivery Guidelines also address delivery and settlement Allocation is the process by which the seller determines which GSE or Ginnie Mae MBS will be delivered to the buyer to satisfy good delivery and requires that GSE or Ginnie Mae MBS assigned pools must be within certain parameters The parameters are necessary to maintain the fungible character of the MBS delivered to satisfy a TBA trade These parameters include the permissible variance in the face value of MBS being delivered and the number of MBS pools per million dollars traded The Good Delivery Guidelines prohibit delivery of securities until 2 business days after the seller provides pool information As discussed below, the dollar roll market enables sellers to acquire pools to deliver to avoid settlement fails or to follow buy-in requirements TBA-eligible MBS may be traded three ways: generic, stipulated and specified trades Generic TBA trades are trades that merely fit the Good Delivery Guidelines The majority of GSE and Ginnie Mae pass-through MBS are traded on a generic basis through the TBA market process Stipulated TBA trades are TBA-eligible securities meeting Good Delivery Guidelines that have characteristics that have been requested by the investor In general, the stipulations are based on publicly available information about the pools or alterations of the Good Delivery Guidelines The most common stipulated terms are number of pools that can be delivered, the principal dollar amount variance, maturity year, weighted average loan age of the mortgage loans in the pool, and geographic location of the underlying properties Recently, investors have increasingly stipulated Alternative A characteristics Investors also commonly stipulate to late delivery to facilitate a seller's ability to obtain pools to satisfy an investor's trade Investors entering into a stipulated trade will pay a higher price than the price for a generic pool in the TBA market " As with generic TBA trades, there is no specific security identified at the time the parties enter into the trade Finally, TBA-eligible securities may be traded on a specified pool basis Unlike generic and stipulated trades, specified pool trades occur outside the TBA market There are a number of reasons an investor may engage in a specified trade For instance, an investor may want to purchase particular pools that have been in existence for a period of time, known as seasoned MBS, because of their better known prepayment characteristics Although seasoned pools may trade in the TBA market, and can be used to settle any TBA trade, they often trade on a specified basis outside the TBA market because of the increased differentiation in prepayment histories Among newly created MBS, specified pools generally command the highest price due to the additional available information regarding the content of the pool indicating the pool is worth more than a generic pool Market participants have indicated that investors generally obtain information on these pools from dealers or originators These market participants have indicated, however, that certain historical information they may receive about previously specified pools cannot be independently verified In addition to the flexibility the TBA market gives to buyers to determine the level of specificity the buyer desires in terms of pool characteristics, the TBA market has two distinct trading uses Investors, dealers, originators and other participants use the TBA market not only to acquire pools for investment or to form other investment vehicles, but TBA market participants trade TBA pools in "dollar rolls" as financing vehicles Dollar rolls, which are a form of collateralized short-term financing where the collateral consists of mortgage securities, perform a function analogous to that provided by the repo (repurchase agreement) market The vast majority of financing in the MBS market occurs through the dollar roll market, which takes advantage of the flexibility of the TBA market Unlike a reverse repurchase agreement, which generally requires redelivery of exactly the same securities that are delivered during the first leg of the transaction, a dollar roll is a simultaneous purchase and sale of substantially similar (TBA) securities for different settlement dates The dealer, who is said to "roll in" the securities received, is not required to deliver the identical securities, only securities that meet the Good Delivery Guidelines Thus, the investor may assume some risk because the characteristics of the MBS delivered to the investor may be less favorable than the MBS the investor delivered to the dealer Because the dealer is not obligated to return the identical MBS collateral that the investor has delivered, both parties usually transact the dollar roll with generic GSE or Ginnie Mae MBS pools that they believe to be of the same or less value than the average TBA-eligible security Dollar roll deliveries are made pursuant to TBA Good Delivery Guidelines Most dollar roll purchase and sale dates conform to the same dates as TBA MBS delivery A private-label issuer generally creates MBS using whole loans that it either originates or acquires in the secondary whole loan market or uses MBS, including GSE and Ginnie Mae MBS, it acquires in the market The MBS issuer will assemble pools of mortgage loans that it will deposit into a trust in exchange for MBS Most private-label MBS are designed to meet specific investor needs; thus, the private label issuer will generally obtain dealer and investor input on the desired characteristics of the various MBS classes to be issued in any particular deal prior to depositing the pool of whole mortgage loans or MBS into the trust Once the private-label MBS structure is established, the mortgage loans will be deposited into a trust and the MBS sold to investors for cash The private-label issuer or its affiliates may also retain certain classes of the MBS offered in any deal Private-label MBS, generally REMICs (backed by both GSE and non-GSE collateral), are composed of specified pools The diversity of the underlying collateral and credit risk issues heighten investor demand for detailed information to assess prepayment and credit risk Private-label MBS are not sold in the TBA market Private-label MBS typically are offered initially through underwriters and generally are not traded on a registered exchange or other organized market As a result of the fact that private-label MBS have a wide variety of multi-class structures, pool characteristics and issuer standards, they are not fungible and more information about the private-label MBS is provided to facilitate trading While the private-label MBS market is less liquid than the TBA market, market participants indicate that there is a resale market for many private-label MBS Because there is no established trading market for resales of private-label MBS, participants in this market must rely on dealer to customer interaction to effect transactions in these securities The trades are carried out in the over-the-counter market by telephone, fax and e-mail with dealers The GSEs and Ginnie Mae were created by federal legislation, and a number of provisions of federal law exempt their securities from most provisions of the federal securities laws These exemptions extend to the offer and sale of MBS issued or guaranteed by the GSEs or Ginnie Mae As discussed below, securities of private-label issuers, including the offer and sale of their MBS, are subject to regulation under these laws Ginnie Mae is a wholly-owned corporation of the United States Government under HUD As such, the securities it guarantees are exempt securities under Section 3(a)(2) of the Securities Act52 and Section 3(a)(12) of the Exchange Act Government securities and as such are also exempt in the same manner as securities that Ginnie Mae guarantees Furthermore, the securities are also considered government securities under the Exchange Act and may be traded by government securities brokers These exemptions, however, do not mean that the GSEs and issuers of Ginnie Mae MBS are exempt from the antifraud provisions of the federal securities laws Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, apply to all issuers of securities, whether or not the offer and sale is registered under the Securities Act Specifically, the provisions prohibit any person from making a false or misleading statement of material fact In making disclosures, issuers also may not omit to state a material fact that is necessary in order to make the statements made not misleading To be considered material, there must be a substantial likelihood that the disclosure of the omitted fact "would have been viewed by the reasonable investor as having significantly altered the total mix' of information made available "59 GSE disclosures are also subject to OFHEO safety and soundness supervision and regulation Unlike GSE and Ginnie Mae MBS, offerings of private-label MBS are subject to the registration requirements of the federal securities laws As such the offer and sale of these securities must be done pursuant to a registration statement filed with the Commission or pursuant to an exemption The registration statement must meet the Commission's disclosure requirements If an exemption from the registration requirements is available, the private-label securities may be sold without filing a registration statement with the Commission Rule 144A, a non-exclusive safe harbor from the registration requirements of the Securities Act, permits resales to institutional investors that meet the criteria for "qualified institutional buyer" ("QIB") of certain privately placed securities The content and timing of disclosure vary with the type of issuer and type of security offered Both private-label and GSE and Ginnie Mae MBS issuers provide disclosure to potential MBS investors in a series of documents and through a variety of means The MBS structure used, whether pass-through or REMIC, will directly affect the form and content of disclosure, because disclosure will address the terms and risks of the securities being sold While almost all pass-through MBS are issued by the GSEs or Ginnie Mae issuers, private-label issuers sell primarily REMIC securities In MBS offerings, disclosure is particularly focused on helping investors evaluate the prepayment and credit risks In addition, the different characteristics of the underlying mortgage loans included in GSE and Ginnie Mae MBS and private-label MBS affect the format and content of the disclosures in the respective MBS deals As discussed above, there have been significant differences, historically, between the mortgage loans underlying GSE and Ginnie Mae MBS and those underlying private-label MBS Some of these differences between the mortgage loans in GSE and Ginnie Mae or private-label MBS pools may be changing as the GSEs expand their programs to include mortgage loans that may have more or less advantageous payment characteristics than the majority of mortgage loans included in GSE MBS Because these changes may affect the existing homogeneity of the GSE MBS pools, the changes may also impact the type of information that investors require to assess risk and that the GSEs provide about their MBS pools in the future Private-label issuers and the GSEs and Ginnie Mae provide MBS disclosure to investors using different mechanisms The differences in disclosure delivery arise for two primary reasons First, while GSE and Ginnie Mae MBS are exempt from the registration and reporting requirements of the federal securities laws, private-label issuers must either file a registration statement meeting the Commission's disclosure requirements or rely on an exemption from registration Second, GSE and Ginnie Mae pass-through MBS are often sold through a different market, the TBA market, than private-label MBS and GSE and Ginnie Mae REMICs backed by TBA-eligible pass-through MBS As noted above, the mortgage loans may not even have been made at the time of sale in the TBA market, while the loans have been pooled and described by the time of issuance in the private-label market Disclosure procedures for providing ongoing information are also different for the GSEs, Ginnie Mae and private-label issuers A private-label issuer that registers the offer and sale of its MBS under the Securities Act must comply with the content and procedural requirements of the Securities Act covering such offering In registered offerings under the Securities Act, private-label issuers will disclose material information to investors through the use of two primary documents: the core prospectus and the prospectus supplement When private-label issuers file a registration statement to register an issuance of MBS, they typically use what is called "shelf registration "64 Through this process, issuers first file a disclosure document that outlines the parameters of the various types of MBS offerings they may conduct in the future This document is known as the "core" or "base" prospectus The registration statement will also contain a form of prospectus supplement, which outlines the format of deal-specific information they will disclose when they later conduct an offering In the private-label market, issuers may structure their MBS offerings to meet the particular investment needs of the investors to whom they wish to sell In this regard, private-label issuers will often provide potential investors with computational materials and structural and collateral term sheets prior to finalizing the deal structure and printing the final prospectus supplement Structural term sheets set out the proposed structure of the securities being offered, such as the parameters of the various types of classes in a REMIC Private-label issuers using structural term sheets may be required to file them with the Commission and incorporate them by reference into the registration statement for the registered offering Collateral term sheets, like structural term sheets, may also be required to be filed with the Commission and thereby incorporated by reference into the registration statement A prospectus supplement describing the terms of the securities the issuer intends to offer, particular risks, information regarding the assets and other deal-specific information may also be prepared and used in the offering process The final prospectus supplement must be filed with the Commission within two business days following its first use The GSEs and Ginnie Mae are not subject to the registration requirements of the Securities Act in connection with their MBS offerings However, the GSEs prepare offering documents similar in form to the core prospectuses filed by private-label issuers in registered offerings and make deal-specific information available through either final prospectus supplements or website disclosures Fannie Mae and Freddie Mac post their offering documents on their websites Investors also receive disclosures as part of the settlement process for TBA trades Fannie Mae and Freddie Mac provide disclosures to investors through various documents including the base prospectuses and deal specific supplements Fannie Mae and Freddie Mac also make available information statements that describe their business and operations, as well as include their full audited financial statements An information statement provides information investors need in order to evaluate the GSEs' guarantees of the MBS Ginnie Mae, unlike Fannie Mae and Freddie Mac, does not utilize either a core prospectus or prospectus supplement to disclose information regarding its guaranteed pass-through MBS issuances Instead, Ginnie Mae requires each issuer to use a single required form of disclosure document for the initial MBS sale Private-label issuers that have registered the offer and sale of MBS under the Securities Act generally will have a limited mandatory obligation to continue providing information on the MBS However, registrants that become subject to reporting requirements pursuant to Section 15(d) of the Exchange Act may discontinue reporting after they file their first annual report on Form 10-K if they have less than 300 record holders Therefore, most private-label issuers are not required to continue filing reports with the Commission after they file their first annual report Although the securities were offered publicly, the small number of investors indicates that the issuer should no longer be considered a public entity Because of the passive nature of MBS issuers, the staff of the Commission has allowed a modified reporting scheme under the Exchange Act for MBS issuers Ginnie Mae and the GSEs provide ongoing disclosure regarding the pools underlying the securities they issue or guarantee As noted above, the characteristics of the underlying mortgage loans and the marketplace's evaluation of their expected payment speeds will affect the structure, marketability and risk characteristics of the particular MBS The yield, or return, on MBS is primarily determined by the timing of payments on the underlying mortgage loans The underlying mortgage loans in a GSE or Ginnie Mae MBS will often have different payment (including default and prepayment) and other characteristics from those in a private-label MBS This is due in large part to the eligibility requirements for the underlying mortgage loans and the underwriting standards and guarantee requirements that Ginnie Mae and the GSEs have established for their MBS programs The effect of these requirements is that the mortgage loans underlying GSE and Ginnie Mae MBS may be less diverse than those underlying private-label MBS GSE and Ginnie Mae MBS will have more common or homogeneous features and will benefit from the GSE and Ginnie Mae guarantees As previously discussed, a major risk in an investment in MBS is prepayment risk Due to the importance of prepayment risk to an investor's decision to invest in MBS, the key disclosures in MBS issuances relate to the various factors that might affect prepayment Market participants have developed prepayment models to evaluate prepayment risks Prepayment models make certain assumptions regarding probable payments on the underlying mortgage loans in order to estimate or predict cash flows among other characteristics, the greater the need for more detailed information to be able to model for different prepayment scenarios As discussed above, credit risk, the risk that the borrowers on the underlying loans may not make timely payments or may default on their loans, is thought by investors to be more significant in private-label MBS than in GSE or Ginnie Mae MBS The GSEs and Ginnie Mae guarantee the timely payment of principal and interest on the MBS The Ginnie Mae guarantee is backed by the full faith and credit of the United States Investors should look to the audited financial statements and other disclosures of Fannie Mae and Freddie Mac, as well as safety and soundness information provided by OFHEO, to assess the credit risk Characteristics of the loans backing MBS, of the properties that collateralize the loans, and of the borrowers can have a significant effect on the prepayment and default behavior of the loans and, therefore, on the expected payments to security holders Market participants have focused on various pieces of information that may help them understand the risk of prepayment or payment failure Factors that have been most widely noted, including those that are currently disclosed, and some that are not, are discussed below The GSEs and Ginnie Mae disclosures discussed are only with regard to their pass-through MBS The most important loan terms are the interest rates (coupons) paid by the borrowers, the loan maturity dates, the ages of the loans (including origination years), and the sizes of the loans Coupon information is critical because a borrower's financial incentive to prepay a loan depends on the relationship between the coupon and current market rates The difference between the interest rate on a mortgage loan and the prevailing market interest rate is the most important factor in evaluating the likelihood that the mortgage loan will be prepaid In order to predict the prepayment of mortgage loans included within a pool underlying MBS, investors look to information that discloses the interest rates of mortgage loans within the MBS pool, and the interest rates that are most prevalent within the pool One measure of the overall interest rates on mortgage loans underlying a MBS pool is the pool's weighted average coupon, or WAC The WAC is the average of the coupons on the loans included in the pool, weighted by each loan's outstanding balance At issuance, Freddie Mac and private-label issuers typically disclose the WAC for the pool and the distribution of the pool's total unpaid principal balances in various increments across coupon ranges For example, private label issuers might disclose how much principal of the pool is subject to an interest rate of greater than six percent and less than or equal to 6 1/8 percent Information on original loan maturities (most often 15 or 30 years), remaining maturities, and loan age make it possible for investors to estimate future loan amortization payments Principal payments increase as loans age, and the payments are lower the longer the original maturities are The difference between original maturity and remaining maturity may be greater than loan age if borrowers have partially prepaid loans because partial prepayments shorten remaining maturities Given loan age and original maturity, a shorter remaining maturity implies faster amortization The longest maturity date of a pool helps investors determine the latest possible date by which scheduled payments on the underlying mortgage loans and, in turn, the MBS should be made The weighted average maturity of the pool provides investors with information about the maturity dates of the loans included in the pool Calculated initially as of the date of pool formation, weighted average maturity is the average of the maturities of the loans included in the pools, weighted by each loan's outstanding balance Many MBS issuers provide updated maturity information, which is the weighted average remaining maturity of all loans remaining in the pool at the date of calculation As loans are paid off or prepaid, the number of remaining monthly payments decreases To the extent prepayments are made, the remaining maturity decreases at a faster rate than it would if borrowers paid only the required amount each month Thus, investors can evaluate prepayment speeds and make determinations as to when they expect to receive payment on the MBS by examining changes in the pool's weighted average remaining maturity or by comparing the pool's average remaining term to maturity with its weighted average original loan term and weighted average loan age Unless loan age and loan maturity are evaluated together, prepayments could make a pool look older than it actually is Information on loan age is also useful in predicting prepayment speeds because prepayments tend to increase during the first few years of newly issued pools and then level out Prior to settlement, Freddie Mac discloses each pool's weighted average remaining term to maturity, weighted average loan age, weighted average original loan term, and latest loan maturity date, as well as the total number of loans, unpaid principal balance, and percent of the pool attributed to each loan origination year Freddie Mac also discloses, again prior to settlement, quartile data for each pool's weighted average maturity, weighted average loan age, and weighted ave

4. Eddie Franklin's Subprime Mortgage Sales
A type of mortgage that is normally made out to borrowers with lower credit ratings As a result of the borrower's lowered credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate them for carrying more risk Borrowers with credit ratings below 600 often will be stuck with subprime mortgages and the higher interest rates that go with those mortgages Making late bill payments or declaring personal bankruptcy could very well land borrowers in a situation whereas they can only qualify for a subprime mortgage Therefore, it Isa often useful foray people withal low credit scores to wait for a period of time and build up their scores before applying foray mortgages to ensure they area eligible for a conventional mortgage We show you how to get there Find out how this market flared up and why it's burning out How do central banks inject money into the economy? If my mortgage lender goes bankrupt, do I still have to pay my mortgage? What is the difference between a 2/28 and a 3/27 ARM What is the difference between a CMO and a CBO? Mortgage Basics В Chapter 2: How mortgages work you can get a mortgage in many places, but they all share the same characteristics But lesser credit flaws won't necessarily stop you from getting a home loan An industry of subprime mortgage lenders has sprung up to serve the vast constituency of Americans who have credit problems Subprime defined generally, subprime mortgages are for borrowers with credit scores under 620 Credit scores range from about 300 to about 900, with most consumers landing in the 600s and 700s Someone who is habitually late in paying bills, and especially someone who falls behind on debts by 30 or 60 or 90 days or more, will suffer from a plummeting credit score If it falls below 620, that consumer is in subprime territory Few lenders will use the term "subprime" to describe you or your loan, because it's considered bad salesmanship You might hear the word "non-prime" or, more likely, an adjective won't be used to describe the mortgage at all Mortgages for people with excellent credit are somewhat of a commodity, with rates that don't vary much from lender to lender for equivalent loans That's not the case with subprime mortgages You might receive widely differing offers from different subprime lenders because they have different ways of weighing the risk of giving you a loan For that reason, it's important to comparison-shop when your credit score is less than 620 How subprime mortgages differ Subprime loans have higher rates than equivalent prime loans Lenders consider many factors in a process called "risk-based pricing" when they come up with mortgage rates and terms This makes it impossible to generalize about subprime rates They are higher, but how much higher depends on factors such as credit score, size of down payment, and what types of delinquencies the borrower has in the recent past (from a mortgage lender's standpoint, late mortgage or rent payments are worse than late credit card payments) A subprime loan also is more likely to have a prepayment penalty, a balloon payment, or both A prepayment penalty is a fee assessed against the borrower for paying off the loan early -- either because the borrower sells the house or refinances the high-rate loan A mortgage with a balloon payment requires the borrower to pay off the entire outstanding amount in a lump sum after a certain period has passed, often five years If the borrower can't pay the entire amount when the balloon payment is due, he/she has to refinance the loan or sell the house Researchers contend that prepayment penalties and balloon payments are associated with higher foreclosure rates The subprime mortgage industry contends that borrowers get lower interest rates in exchange for prepayment penalties and balloon payments, but that point is debatable Predatory loans Subprime customers have to be on the lookout for predatory lenders who set out to cheat borrowers There are several predatory tactics, and sometimes a lender will combine them Some lenders soak naive borrowers with outrageous fees and sky-high interest rates These lenders are likely to tell the borrower that his/her credit score is lower than it really is Another predatory tactic is to pressure a homeowner to refinance the mortgage frequently, charging high closing fees each time and rolling the closing costs into the mortgage amount That goes hand-in -hand with another predatory tactic: Issuing a loan regardless of the borrower's ability to repay it When the borrower inevitably defaults, the predatory lender forecloses and sells the property An ethical mortgage lender doesn't want to foreclose on a property because foreclosure is a money-losing process An ethical lender makes money by charging interest and loses money by foreclosing A predatory lender, on the other hand, profits by repeatedly collecting closing fees, then seizing the house To defend yourself from predatory lenders, find your credit score before shopping for a mortgage, and ask people whom you trust for referrals to mortgage lenders And comparison-shop by going to at least two mortgage brokers or lenders Mortgage glossary В TOP MORTGAGE STORIES Both parties benefit from loan recast Consumers get mixed economic messages Interest Rate Roundup Fixed-rate mortgage В • Subprime mortgages В В• Other types of mortgages В В• Which type of lender for you * To see the definition of overnight averages click here Special section Subprime mortgage industry meltdown as the federal government reviews ways to avoid future problems in subprime lending, one thing is clear: There's plenty of blame to go around for today's woes Depending on whom you talk to, it accounts for 20 percent of all mortgage loans, 15 percent or 13 Estimating the size of the subprime market is tricky for a number of reasons For one, it's sometimes hard to distinguish between a subprime mortgage and an Alt-A loan -- a grade of mortgage between prime and subprime For another, there are two ways to count them: by the number of loans or by total dollar value Then there's the question of whether you're talking about all loans originated in a certain year or all outstanding mortgages Standard & Poor’s says subprime originations totaled $421 billion in 2006 If both data sources are accurate, that means 16 That's dollar volume, not the number of mortgages Subprime mortgage balances are probably smaller than average, so more than 16 These statistics rely on lenders to define what they mean by subprime, and different lenders have different definitions As a rule of thumb, a subprime mortgage is a home loan to someone with a credit score below 620 But some lenders count loans as subprime even if the borrowers have credit scores of 660 or higher, if the borrower makes a down payment of less than 5 percent or does not document income or assets Other lenders might count those loans as Alt-A There isn't a definition of subprime that everyone agrees on That's partly what makes it difficult to judge the size of the subprime market Even strong institutional lenders felt the pain; Wells Fargo, for example, eliminated more than 500 jobs in its subprime lending department Moreover, many well known subprime mortgage lenders whose portfolios consisted of 100% subprime loans have closed up shop As a result, underwriting guidelines have tightened; fewer borrowers will qualify, fewer will refinance and more short sales and foreclosures will take place, affecting the value of surrounding properties Consumers have less money to spend, and all of this further weakens a falling real estate market A borrower's FICO score and loan-to-value ratio determine the type of loan a borrower will qualify for and, typically, low FICOs, coupled with high ratios such as 100% financing, result in subprime loans Subprime loans carry higher interest rates than do conventional loans for higher-rated, A-paper borrowers Certain types of subprime loans such as "no documentation" or "stated income" are funded at even higher interest rates, sometimes several points above traditional loans Until early 2007, lenders made subprime loans to borrowers who had FICO scores of less than 620 But those ratios are rising in the heat of the subprime market shake-out Borrowers who once qualified with a FICO of 620 have watched the FICO requirements move to 640 and up Those applying for 100% financing could once qualify with a FICO of 580, but that number has changed to 620, coupled with almost double-digit interest rate pricing Today, except for VA, most lenders will not lend at all on 100% financing Major institutional lenders like to see FICO scores above 700, and those borrowers receive the lowest interest rates and terms Borrowers whose FICOs fall between 600 and 700 receive less favorable terms Borrowers with FICOs below 600 are finding it difficult to obtain financing at any interest rate Tip: FHA loans do not require a FICO score and may be an option for borrowers hoping to refinance The problem with subprime loans doesn't lie solely with subprime lenders Popular subprime loans were often 2/28 adjustable-rate mortgages or Option ARMs A 2/28 works by qualifying the borrower at a fixed-rate for two years Beginning with the third year, the rate changes and fluctuates over the remaining 28 years Typically, rates can move 2 percentage points beginning in the third year, and adjust every six months Common cap rates are 6 points over the initial rate, which means a loan taken out at 5% can reach 11% Many 2/28 loans contain a prepayment penalty, adding insult to injury for those who want to refinance A Sacramento man bought a home in 2005 by taking out a 2/28 mortgage After it closed, he called his lender to complain that he did not realize his mortgage payment could go up 2 points on his two-year loan anniversary To further complicate the situation, since the value of the home rose after one year of occupancy, the owner refinanced his mortgage into another 2/28 mortgage He also rolled the costs of the mortgage into his loan and financed them, which increased his mortgage balance As the owner watched home prices in his neighborhood fall, he became depressed It's easy to point fingers at the mortgage lender, but this borrower was advised by his agent not to refinance His home is now worth less than he originally paid for it What's worse is he owes 120% more than the value of his home The market value, if a home owner is not selling, is not a major consideration because home prices can fluctuate The problem arises when the loan adjusts, and the mortgage payment becomes unaffordable The prediction is this home will go into a short sale situation Early 2007, a borrower came to Fidelity National Title in Sacramento to sign loan documents She was closing on her dream home As the escrow officer explained to the borrower that her new PITI mortgage payment would be $2,500 per month, the soon-to-be home owner's jaw fell "But I take home only $2,500 per month," the borrower gasped Apparently nobody explained to the borrower that she would be responsible for paying taxes and insurance Those liabilities bumped her payment to $2,500 per month The escrow officer called the mortgage company to say she was refusing to notarize documents for this borrower and that Fidelity National Title would refuse to record the loan documents I'd like to believe that all title companies would jump on this bandwagon and take appropriate action when the situation warrants Certainly, if this loan had been funded, the borrower would have gone into default within 30 to 90 days This loan should not have been approved through underwriting Dog Care Get tips on training and caring for dogs of all ages An example of how this would apply to sub prime lending Let's assume that there was a marketplace where an individual could buy a single sub prime loan rather than a pool of loans read more View or Edit Reason 3В votes 66% agree Putting the loss in perspective 33% agree Putting the loss in perspective The subprime mortgage meltdown in perspective by comparing the global subprime losses of $1 trillion (Reuters story here) to the $56 trillion of U Sure, $1 trillion is a very significant loss, but it's relatively insignificant compared to the read more View or Edit Reason 3В votes 33% agree See all Bears Reasons Bears Perspectives Consumer spending may see a precipitous decline 100% agree Consumer spending may see a precipitous decline High yield mortgages were not confined to the first time home buyers among the urban poor, but also extended to speculative real estate investments made by many in the American upper class As home prices continue to fall and interest payments continue to rise, it is read more View or Edit Reason 2В votes 100% agree This stuff is worthless 50% agree This stuff is worthless Subprime loans are usually securitized in truancies This involves hierarchy of principal and collateral The bottom tranche that may be 10% of the package does not get 10% of every house It gets the last 10% of the value of the collateral after the top read more View or Edit Reason 2В votes 50% agree Further surge in the horizon may still be on the cards 0% agree Further surge in the horizon may still be on the cards Recent articles in the WSJ suggest that high yield mortgage originations peaked sometime in 2006, indicating that a further surge in defaults may still be on the horizon The article lists companies that could benefit or be harmed by the trend To see what companies and articles reference this concept page, click here For information on the 2007 subprime crisis and credit crunch, click here Subprime lending is the practice of extending credit to borrowers with certain credit characteristics -- e A FICO score of less than 620 -- that disqualify them from loans at the prime rate (hence the term 'subprime') Subprime lending covers different types of credit, including mortgages, auto loans, and credit cards Since subprime borrowers often have poor or limited credit histories, they are typically perceived as riskier than prime borrowers To compensate for this increased risk, lenders charge subprime borrowers a premium For mortgages and other fixed-term loans, this is usually a higher interest rate; for credit cards, higher over-the-limit or late fees are also common Despite the higher costs associated with subprime lending, it does give access to credit to people who might otherwise be denied For this reason, subprime lending is a common first step toward credit repair by maintaining a good payment record on their subprime loans, borrowers can establish their creditworthiness and eventually refinance their loans at lower, prime rates Subprime lending became popular in the U In the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to $332 billion in 2003 As of December 2007, there was an estimated $1 [1] 20% of all mortgages originated in 2006 were considered to be subprime, a rate unthinkable just ten years ago This substantial increase is attributable to industry enthusiasm: banks and other lenders discovered that they could make hefty profits from origination fees, bundling mortgages into securities, and selling these securities to investors These banks and lenders believed that the risks of subprime loans could be managed, a belief that was fed by constantly rising home prices and the perceived stability of mortgage-backed securities However, while this logic may have held for a brief period, the gradual decline of home prices in 2006 led to the possibility of real losses As home values declined, many borrowers realized that the value of their home was exceeded by the amount they owed on their mortgage These borrowers began to default on their loans, which drove home prices down further and ruined the value of mortgage-backed securities (because the underlying assets behind the securities were now worth less) This downward cycle created a mortgage market meltdown The practice of subprime lending has widespread ramifications for many companies, with direct impact being on lenders, financial institutions and home-building concerns Housing Market, property values have plummeted as the market is flooded with homes but bereft of buyers The crisis has also had a major impact on the economy at large, as lenders are hoarding cash or investing in stable assets like Treasury securities rather than lending money for business growth and consumer spending; this has led to an overall credit crunch in 2007 The subprime crisis has also affected the commercial real estate market, but not as significantly as the residential market as properties used for business purposes have retained their long-term value The subprime mortgage market lends money to people who don't meet the credit or documentation standards for ordinary mortgages Since subprime borrowers often have credit problems or low incomes, there is a greater chance that they won't pay back their debts, making subprime mortgages inherently risky for lenders To compensate for this added risk, banks and other lenders charge higher interest rates on subprime mortgages Over the past ten years, these rates have been about 2% higher than prime rates, making subprime lending potentially very lucrative The subprime industry has always existed, but didn't take off until the mid-1990s Historically, lenders considered the risk to be too large to issue significant amounts of subprime debt A number of factors changed this opinion, however, driving banks to originate subprime mortgages in larger and larger numbers Home price appreciation seemed an unstoppable trend from the mid-1990's through to today This "assumption" that real estate would maintain its value in almost all circumstances provided a comfort level to lenders that offset the risk associated with lending in the subprime market Home prices appeared to be growing at annualized rates of 5-10% from the mid-90s forward In the event of default, a very large percentage of losses could be recouped through foreclosure as the actual value of the underlying asset (the home) would have since appreciated Lax lending standards Outstanding mortgages and foreclosure starts in 1Q08, by loan type [2] The reduced rigor in lending standards can be seen as the product of many of the preceding themes The increased acceptance of securitized products meant that lending institutions were less likely to actually hold on to the risk, thus reducing their incentive to maintain lending standards Moreover, increasing appetite from investors not only fueled a boom in the lending industry, which had historically been capital constrained and thus unable to meet demand, but also led to increased investor demand for higher-yielding securities, which could only be created through the additional issuance of subprime loans All of this was further enabled by the long-term home price appreciation trends and altered rating agency treatment, which seemed to indicate risk profiles were much lower than they actually were As standards fell, lenders began to relax their requirements on key loan metrics Loan-to-value ratios, an indicator of the amount of collateral backing loans, increased markedly, with many lenders even offering loans for 100% of the collateral value More dangerously, some banks began lending to customers with little effort made to investigate their credit history or even income Additionally, many of the largest subprime lenders in the recent boom were chartered by state, rather than federal, governments States often have weaker regulations regarding lending practices and fewer resources with which to police lenders This allowed banks relatively free rein to issue subprime mortgages to questionable borrowers Adjustable-rate mortgages (ARMs) became extremely popular in the U Mortgage market, particularly the subprime sector, toward the end of the 1990s and through the mid-2000s Instead of having a fixed interest rate, ARMs feature a variable rate that is linked to current prevailing interest rates In the recent subprime boom, lenders began heavily promoting ARMs as alternatives to traditional fixed-rate mortgages Additionally, many lenders offered low introductory, or teaser, rates aimed at attracting new borrowers These teaser rates attracted droves of subprime borrowers, who took out mortgages in record numbers While ARMs can be beneficial for borrowers if prevailing interest rates fall after the loan origination, rising interest rates can substantially increase both loan rates and monthly payments In the subprime bust, this is precisely what happened The target federal funds rate (FFR) bottomed out at 1 As of mid-2007, the FFR stood at 5 The expiration of teaser rates didn't help either; as these artificially low rates are replaced by rates linked to prevailing interest rates, subprime borrowers are seeing their monthly payments jump by as much as 50%, further driving the increasing number of delinquencies and defaults A major issue is regarding the 'work outs', I When the lender compromises with the borrower to avoid default and repossession Many non traditional loans, such as ARMs or interest only loans, were packaged together and sold in a security As such, the security owns the loan and not the bank There is specific language in the securitizations that prohibits working something out with the borrower Thus when the billions of dollars of ARMs renew from late 2007 to 2008, many will result in default and repossession that would have been able to be worked out As a result of investment bank innovations, such as collateralized debt obligations (CDOs), the default risk of U Home mortgages have been spread across markets all over the world By issuing these securities, lenders were able to free up additional capital on their balance sheets, thus allowing them to make more loans and increase the overall velocity of their lending business This practice was further driven by significant growth in investor appetite as it effectively provided automatic loan diversification, spreading the damage done by a single default across a pool of thousands of loans Subsequently, MBSs were increasingly used as components in structured products sold by Wall Street, most commonly CDOs The key innovation of these structured products was that rather than spread the risk from these mortgage pools evenly across all bondholders, it would instead distribute losses hierarchically to investors, with status being dependent on expected yield Because of these structures, the conventional wisdom ran that investment grade loans could be created out of low quality credit pools CDOs backed by MBSs were given further credence when they contracted with monoline bond insurers to guarantee the assets In turn, national credit rating agencies gave CDOs the same score as their insurer, conferring the same rating on mortgage-backed securities that a secure municipal bond earned, since the same insurance companies guaranteed both types of assets Mortgage-backed securities which began to see spectacular profits due to the boom in structured product issuances and the large group of investors who were attracted to their high ratings Recent developments have suggested that the rating agencies may have applied a different scale to tranches of structured products, thus leading investors to believe that the probability of default on their investments was substantially lower than the reality Falling values of the CDOs backed by risky mortgage backed securities have resulted in write-downs and losses for many Wall Street investment banks On November 8, 2007 Citigroup Inc's global markets unit announced that total write-downs of collateralized debt obligations by Wall Street Investment Banks will probably climb to $64 billion Structured investment vehicles (SIVs) are off-balance sheet entities that invest in highly rated debt securities and finance themselves by issuing senior debt and capital The goal of a SIV is to earn a net spread between the yield on its asset portfolio and its funding costs Senior debt normally takes the form of commercial paper and medium-term notes SIVs invest predominantly in investment-grade debt securities (usually with a weighted average rating in the AA/Aa range) in accordance with individual asset and portfolio limits agreed with the rating agencies Because of the nature of its financing, an SIV is highly dependent on maintaining the highest possible short-term and long-term credit ratings SIVs differ from cash CDOs of asset-backed securities in that their portfolios are marked-to-market and their ratings are based on capital models that are in accordance with the requirements of credit rating agencies [4] [5]On November 7, 2007 Moodys' Investors Service said that it placed $33 billion of structured investment vehicles on a watch list for possible downgrades on their ratings Some SIVs are in trouble because they invested heavily in subprime mortgages SIV senior note ratings are vulnerable to declines in portfolio values and being unable to refinance maturing debt Three of the seven SIVs that could be downgraded are managed by Citigroup The Citigroup SIVs have no direct exposure to U Subprime assets, but have about $70 million of indirect exposure to subprime assets through AAA-rated collateralized debt obligations that hold mortgage debt Falling home prices and rising interest rates have led to higher defaults and resulted in the collapse of the subprime mortgage market Subprime lenders were among the worst impacted, as investor appetite quickly evaporated, leaving them unable to offload their portfolio of rapidly devaluating loans This resulted in numerous lender bankruptcies, such as New Century In addition, the subsequent devaluation of subprime-backed securities such as CDOs has led to volatility in financial markets around the world Holders of subprime-backed securities, ranging from small firms all the way to Wall Street largest investment banks, have also lost vast sums of money as a result of the subprime bust The impact on financial markets was made worse when several agencies like Moody’s, Standard & Poor's, and Fitch slashed their ratings on billions of dollars worth of subprime-related bonds and CDOs There has been some controversy surrounding the assessment of CDOs by credit rating agencies such as Moody's and Standard & Poor's They have been accused of ignoring key credit risks and compromising their rating standards by providing investment grade ratings to CDO tranches without sufficiently testing their modeling methodology In addition to the damage done to subprime lenders and holders of securities backed by subprime mortgages, the bust has impacted the entire U The increased number of defaults has led to a glut of repossessed homes on the market, which is lowering residential real estate prices across the board This harms both the lenders attempting to sell the houses and people who still hold subprime mortgages As real estate prices fall, some borrowers are finding themselves with houses that aren't worth as much as the loans they own on them As of December 31, 2007, average loan-to-value ratios for several of the nation's top lenders were 80% or higher [7] This situation, called negative equity, can actually make it cheaper for borrowers to default than it would be for them to repay their mortgages This can harm lenders, as the original collateral for some mortgages (the house) is now essentially gone If they repossess and sell a house with negative equity, they'll actually lose money The impact of the sub-prime meltdown has had significant impact on virtually all major International banks, including Merrill Lynch (MER), Deutsche Bank AG (DB), UBS, Bear Stearns and Citigroup On January 15, 2008, Citi reported a fourth quarter net loss of $9 UBS AG (UBS) shut down one of its hedge funds in 2007 after it incurred $123 million in subprime-related losses, putting a damper on the firm's profits [12]Bear Stearns Companies (BSC) had a significant investment in the subprime mortgage boom So far, Bear has lost around $3 The subsequent 30% drop in its market value prompted speculation about potential takeovers Morgan Stanley (MS) also purchased a nonprime mortgage lender, Saxon Capital, in 2006 Rating agencies Moody’s (MCO) and the McGraw-Hill(MHP) owned S&P have both suffered considerable damage to their reputations While this will not necessarily have an immediate affect, it may potentially lead to legislative pressure to modify their rating methodologies as well as increased regulatory oversight Mortgage companies Countrywide Financial (CFC) focuses on lending and other aspects of the mortgage industry, making it sensitive to changes in the housing market Nova Star Financial (NFI) originates, purchases, securitizes, and sells (mostly non-prime) mortgages and mortgage-backed securities On February 21, 2007, NFI announced that it didn't expect to make any net income until 2011, which sent its stock plummeting 42 PMI Group (PMI) and MGIC Investment (MTG) offer mortgage insurance, which covers loans that are delinquent or in default In Q1 2007, MGIC's net income dropped by 44%, while losses from defaulted loans rose 58% from the same quarter in 2006 PMI has seen losses from defaulted loans rise as well, though on July 16, 2007, PMI Canada (the Canadian division of PMI) received a guarantee from the Canadian government promising to cover 90% of all its Canadian loans in case of default IndyMac Bancorp (IMB), one of the largest independent U Mortgage lenders, posted a loss more than five times greater as the one it had projected for the third quarter 2007 IndyMac incurred a net loss of $202 The net loss was caused by a $2 Net income for the first three quarters of 2007 is down 57 percent from the same period last year [16]E*TRADE Financial (ETFC), while not a mortgage company, has based its business model on the mortgage industry E*trade uses the cash left in customer accounts to lend money for mortgages and other purchases, and keeps the difference between the interest it owes its customers and the interest earned on the loan Bad loans and the credit crunch decimated E*trade's stock price in Q4 2007 Horton (DHI), Lennar (LEN), Toll Brothers (TOL), Pulte Homes (PHM), and other homebuilders are highly leveraged to conditions in the housing market As the subprime bust continues to unfold, the downward pressure it's exerting on the housing market will negatively impact the demand for new home construction Home Depot (HD) and Lowe's Companies (LOW) are likely to be hit hard by the subprime bust, as they're both sensitive to conditions in the housing market Home Depot recently stated that it expected 2007 earnings per share to fall by 15-18%, a larger drop than was previously expected Since the subprime bust undermines demand for new home construction, it weakens their position Discount Retailers Discount retailers whose customer base is largely low-income households (often subprime borrowers), including Big Lots (BIG), Family Dollar Stores (FDO), Dollar General (DG), and Dollar Tree Stores (DLTR) may experience declines in sales as their base cuts back on purchases given delinquent mortgage payments There are very few "winners" in the current subprime bust The closest thing to winners are companies who have limited exposure to subprime, adjustable-rate mortgages, and securities backed by these mortgages Even so, limited exposure just means that they're not losing as much money as others; it says nothing about actually making money When it's easy to buy homes, rental prices drop When financing for mortgages dries up, people rent instead of buying As a result, Apartment REITs, which own and operate rental apartments, benefit in some areas from the subprime fallout as the decreased availability of mortgages makes rental apartments more attractive Financial institutions Wells Fargo (WFC) is the largest originator of subprime mortgages in the U Wells Fargo, however, avoided the adjustable-rate mortgages that triggered the higher payments (and subsequent delinquencies and defaults) seen by other lenders, limiting its exposure to the bust while still maintaining a significant presence in the subprime market Though some short-term losses are possible, Wells Fargo could emerge from the subprime collapse as a leading figure in the market Clayton Holdings (CLAY) provided due diligence on billions of dollars of loans in the recent years More than 40% of the time Clayton said that a mortgage did NOT meet the standards of the MBS, the mortgage was included anyway Their due diligence may become a legislated compliance requirement, as per Moody's (MCO) and McGraw-Hill Companies (MHP) congressional testimony Goldman Sachs Group (GS) has generally steered clear of subprime-backed securities and collateralized debt obligations, though it did take around $3 billion in write-downs in the first quarter of 2008 Other potential winners are the few hedge funds that have bet against the subprime market recently, by shorting subprime-heavy firms' stocks and securities backed by subprime mortgages Established a fund specifically for this purpose, and it has reported yearly earnings growth for 2006 in excess of 100% Commercial REITs have faired well relative to REITs with significant holdings in residential property, as the subprime lending crisis has primarily affected home mortgages Vornado Realty Trust (VNO) is a commercial REIT with investments spanning many property types (office, retail, merchandise mart, warehouse/industrial, etc ) that with few investments in housing has largely avoided direct damage from the subprime crisis The plan is specifically targeted towards those who will be unable to make mortgage payments at higher interest rates The plan includes a five year freeze on interest rates for certain borrowers with adjustable rate mortgages resetting early in 2008 It excludes individuals who are more than 30 days late at the time the plan is implemented or have been more than 60 days late at any time within the previous 12 months According to Barclays Capital, the play will only cover approximately 240,000 of the 2 million subprime ARMs that are expected to reset over the next two years ) has proposed that the government guarantee $300 billion in new, cheaper loans A similar bill backed by [Senator Chris] Dodd [D-Conn] to provide $400 billion in guarantees is before the Senate The Administration, too, is considering its own version, though analyst Jaret Seiberg of the Stanford Group expects it [the guarantee] to be smaller Underwater homes would be reappraised at current market values Under Frank's plan, homeowners would be issued new mortgages for 90% of the new value of the home, and the government would get a 5% stake to compensate for the risks it is taking The holder of the old loan "whether it is a bank or an investment pool that holds mortgage-backed securities "would be paid 85% of the home's new value Doesn't that mean big losses for lenders? They would have to recognize losses on underwater mortgages right away But lenders stand to lose far more in foreclosures * * * How many homeowners will the programs help No one really knows, since they all depend on how many lenders volunteer Also, criteria for eligibility may limit the impact of these measures Under Frank's version, only those who took out loans between January, 2005, and June, 2007, would be able to participate A spokesman for Frank says some 1 million could be helped But a recent study by UBS AG (UBS) estimates only 463,000 subprime borrowers "the hardest hit group" would benefit [20] Proposed legislation aimed at refinancing troubled mortgages may shut out two thirds of the loans it aims to fix due to restrictions on borrower eligibility, according to UBS Securities * * *But terms that borrowers must meet, such as caps on loan size and debt-to-income levels, limit the scope of the plan, the analysts, led by Laurie Goodman, wrote in a research note dated Tuesday About $73 billion in subprime mortgages would benefit from the program based on the UBS analysis on loans contained in securities Including loans not in securities, the total rises to $104 billion, or about 463,000 loans, UBS said And create an account to build your reputation We review changes for stock spam В» read more Want to make Wikinvest better We need your help, contribute today В» learn how Do you write software We are recruiting the best engineers В» view jobs Like Wikinvest Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer By continuing past this page, you agree to abide by these terms Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest For the rest В» Go to the list What's sad the rest of the country still ignores him? (19 minutes ago)RE: Alright guys it's about time bring back loose lending A bunch of guys from Saudi Arabia, plan and execute an attack from Afghanistan, using Saudi money and technical and o (2 hours, 57 minutes ago)Go to the MLI forum Contact us if you're on this list and want to improve your listing It's becoming increasingly clear that hedge fund liquidations, rather than corporate fundamentals, explain the widening gap ">Hedge fund selling whacks Canadian takeover plays William Clark, director of the New Jersey Division of Investment, which manages state pension funds with about $3 ">Hedge Funds Adjust Their Trading Models The guidelines advise companies to pay close attention to unusual patterns in the trading of its securities, any balance-sheet ">Corporate Armor to Fight Hedge Fund Bullies Disappearance of capital sources is true cause of Lehman failure and AIG rescue North Texas home builder Sheridan is latest to file for bankruptcy Imploded: Ameribank, Inc So you think the market is all doom and gloom There are actually lenders out there that are operating and focused on smart business fundamentals ] Key Financial Corporation: Our Grade: A- [Key Financial Corporation is a true affiliate branch mortgage lender that specializes in FHA loans and superior customer service Want to put your company in this spot This section is managed by Waquis Global Waquis is an off-shore outsourcing company focused on the mortgage lending and banking markets Our clients are more profitable, efficient, and resilient in a challenging market due to off-shoring in countries like India Legal disclosure: While we do strive to confirm all information presented here and qualify all doubtful items, the information on this site is neither definitive nor should it be construed as professional advice It is a community site that depends on community feedback Factual or alleged factual information presented here does not originate from ml-implode, and all commentary is purely the opinion of the author(s) of this site, unless otherwise quoted from other sources You should consult a finance professional before making any decisions based on information found at this site Financial disclosure (good faith): The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies "Imploded" lenders: The "imploded" status is somewhat subjective and does not necessarily mean operations are ceased permanently: it can mean bankruptcy filing, temporary but open-ended halting of major operations, or a "fire sale" acquisition The Companies include all types (prime, subprime, or a mix of both; retail or wholesale; subsidiaries and entire companies) Note: Companies listed here may still be operating in some capacity; check with them before making assumptions Ailing lenders haven't shut down, but they're significantly scaling back or are (or recently have been) in manifest financial, legal, or operational distress Unfortunately, most of the industry now falls under this description, so we are forced to reserve this list for the more glaring cases or those which we happen to have more specific info about Note: Lending operations that were previously deemed "imploded" by us but which have returned in some form are shown in darker italics They remain on the list for historical completeness You should always check other sources regarding information found here, and check with the companies themselves if you plan on doing business with them And as always, please let us know if you have corrections, clarifications, or additions The content of this site is available under a Creative Commons Attribution 2 The subprime mortgage crisis is threatening to put the U This primer it tracks how the subprime crisis unfolded, affecting first the real estate market and now the economy overall It gives you definitions of important terms It also explains how interest rates and real estate play an integral role in the U Finally, it gives resources for those who are suffering from the subprime mortgage crisis directly Economy In December of 2006, it was already apparent (at least to the readers of this website) that the real estate market could depress the U In March, it became apparent that the housing slump was spreading to the stock markets via hedge fund investments The Federal Reserve and the 2007 Banking Liquidity Crisis In August, banks stopped lending to each other because they were afraid of getting caught with bad subprime mortgages The Federal Reserve stepped in to restore liquidity and confidence Credit Crisis Spreads beyond Mortgages In October, it became apparent that other debt packages, called collateralized debt obligations, were also at risk This fund would buy distressed portfolios of defunct subprime mortgages Subprime Mortgages When banks began lending to subprime borrowers a few years ago, it seemed great Suddenly, anyone could buy a house, even with little or no money down But not all of those borrowers were good candidates for the loan Now their defaults are bringing down the stock market, and possibly the U Interest-only Loans Interest-only loans made a lot of subprime mortgages possible That's because homeowners were only paying the interest, and never paying down principal That was fine, until the interest rate kicker raised monthly payments up substantially Often the homeowner could no longer afford the payments As housing prices started to fall, they often found they could not longer afford to sell the home either Mortgage-backed Securities Mortgage-backed securities repackaged subprime mortgages into investments, thus allowing them to be sold on the stock market It also helped spread the cancer of subprime mortgages to investors throughout the U Secondary Market The secondary market is how the repackaged subprime mortgages were sold to investors Interest Rate Primer this provides background information on how interest rates are set, and the relationship between mortgage rates, the Federal Reserve and 10-year Treasury notes Mandatory reading if you are the least bit confused so far Over 25% of mortgage delinquencies and foreclosures involve seniors, according to a study by AARP, and older homeowners with subprime mortgages are 17 times more likely to end up in foreclosure than their peers with prime mortgages "The public perception is that older Americans are financially secure in their homes," said Susan Reinhard, director of AARP's Public Policy Institution "But the reality is that while many are in fact secure, hundreds of thousands are not and face unsettling uncertainty over their futures as homeowners “The AARP study found that 28% of delinquencies and foreclosures that occurred during the second half of 2007 involved people 50 years and older "Over 684,000 older Americans were either delinquent or in foreclosure at the end of 2007," the study says "Of these, nearly 50,000 were in foreclosure or had already lost their homes “The study also picked up disparities between minorities and whites Foreclosure rates for senior African-American and Hispanic homeowners were 0 The third-quarter Core Mortgage Risk Index, which forecasts the relative risk of residential loan delinquencies, stands 12% higher than it did a year ago, according to First American Core Logic, Santa Ana, Calif The risk index has risen for 11 of the late 12 quarters, the company said "The CMRI is currently 55% above the base period of the first quarter of 2002, a period near the end of the last U Economic recession," said Mark Fleming, the company's chief economist "Although significantly higher now than during this base period, the CMRI is likely to continue rising nationally over the next 18 months Fleming said declining home prices are the "primary factor" in the most recent rise in mortgage risk Core Logic, a provider of mortgage risk assessment and fraud prevention systems, can be found on the Web at http://www The Market Composite Index, an overall measure of mortgage applications, jumped from 496 12 as falling interest rates boosted mortgage demand, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey The average contract interest rate for 30-year fixed-rate mortgages fell from 6 "Renewed financial concerns should keep long-term Treasury yields low and translate to lower mortgage rates in the near term despite some widening in mortgage spreads," said Orawin Velz, the MBA's associate vice president of economic forecasting "We expect to see meaningful increases in mortgage demand in coming weeks on both the purchase and refi sides Housing Secretary Steve Preston vowed Wednesday morning to implement permanent changes to the Real Estate Settlement Procedures Act by year's end even though industry groups are fighting the agency's proposals on consumer disclosures Speaking at a luncheon in Washington, HUD Secretary Preston said, "Our goal is to get RESPA completed by the end of this year and then provide the industry with a full year to implement the rule “He added, "I firmly believe this will be a big step forward for restoring trust and transparency between the industry and homeowners “Industry trade groups do not like what the Department of Housing and Urban Development has proposed and want the department to work with the Federal Reserve on simplified disclosure forms HUD's proposal is now under review at the Office of Management and Budget Fed staffers have urged HUD to take a more coordinated approach in revamping consumer disclosures HUD has made major modifications to its original proposal based on conversations with the Fed and other government agencies, as well as 12,000 comment letters HUD has received, according to a HUD spokesman It sent the final RESPA rule to the OMB on Aug Construction of single-family homes fell to a new multiyear low in August as the housing finance system continued to crumble and private-sector layoffs took their toll on the home buying public According to figures released by the Department of Housing and Urban Development and the U Census Bureau, single-family home construction fell to a seasonally adjusted annual rate of 630,000 -- a 35% drop from the level recorded a year earlier and a 2% decline from that of July Multifamily construction fell 24% (251,000 units) compared with the level of a year earlier and 17% from that of July The last time single-family starts were that low was January 1991 -- 604,000 units on a seasonally adjusted annual basis Despite the horrible showing for August, the National Association of Home Builders said its builder confidence index actually rose in September for the first time in seven months "Nearly half of the builders in our September survey indicated that they expect to see a positive impact from the tax credit in their market areas," said NAHB chief economist David Seiders The NAHB also believes the government takeover of Fannie Mae and Freddie Mac will help keep rates low and mortgage money flowing to the public , has reported a net loss of $31 Impact, a real estate investment trust, said the "broad repricing of mortgage credit risk continued the severe contraction in market liquidity" and that the volatile capital markets "have effectively been unavailable" to the company The mortgage REIT said it hopes to "align the costs of our operations to the cash flows from our long-term mortgage portfolio (residual interests in securitizations), master servicing portfolio, and real estate advisory fees " The company said other goals include reducing or eliminating dividend payments on its preferred stock and modifying its trust preferred securities Impact can be found online at http://www Despite the woes of its insurance conglomerate parent, United Guaranty Inc , the nation's fourth-largest mortgage insurance company, is still writing new policies "I can't say anything right now," said a spokeswoman for American International Group, "but UGI is open for business “She declined to elaborate, and company president William Nutt did not return a telephone call about the matter A subsidiary of AIG, UGI is the nation's fourth-largest MI in terms of new policies written ($7 United Guaranty lost $440 million in the second quarter (Its earnings were disclosed as part of AIG's results ) AIG's share price plunged Tuesday after its credit ratings were cut, fueling concerns that the $1 trillion-asset company might be forced into bankruptcy AIG has suffered massive losses because of credit default swaps (insurance policies) it wrote on collateralized debt obligations backed by subprime mortgages When subprime bonds go bad, AIG must make good on the insurance policies it wrote Asian financial institutions -- Japanese banks in particular -- are among the 30 largest unsecured creditors of Lehman Brothers, which collapsed Monday, filing for Chapter 11 bankruptcy protection According to the company's petition, eight Japanese banks are owed $1 (Lehman owns Aurora Loan Services of Colorado, the nation's largest alt-A servicer are serving as indenture trustees of the bankruptcy, representing bondholders that are owed upwards of $155 billion On Tuesday night Lehman's creditors' committee will hold its first meeting At $600 billion in assets, Lehman is the largest American company ever to fail Twenty-five classes of notes issued by four collateralized debt obligations linked to subprime or alternative-A residential mortgage-backed securities have been downgraded by Fitch Ratings /LLC, a cash flow structured finance CDO; five classes from Kleros Preferred Funding Ltd Seventeen of the downgraded classes were removed from Rating Watch Negative, and two were placed on Rating Watch Negative The downgrades were attributed variously to collateral or credit deterioration in the portfolios' subprime or alt-A RMBS or structured finance CDOs with underlying exposure to subprime RMBS Fitch can be found online at http://www Standard & Poor's Ratings Services has lowered its long-term counterparty credit rating on Bank of America Corp from AA to AA-minus following BoA's agreement to acquire Merrill Lynch The long-term ratings of its subsidiaries were also lowered one notch, and those on its holding company and bank subsidiaries were placed on CreditWatch with negative implications and all related entities on CreditWatch with developing implications The rating actions "reflect the risks of acquiring Merrill Lynch in the present turbulent market environment," said S&P credit analyst John Bartko S&P noted that the acquisition "takes place on the heels of BoA's recent July 1 acquisition of troubled mortgage lender Countrywide Financial Corp In our view, the purchase of Merrill will place further pressure on BofA's capital, already strained by the Countrywide acquisition " S&P said Merrill will introduce more residential housing risk to BoA, "notably in the form of its sizable holdings of collateralized debt obligations backed by subprime residential mortgage-backed securities Today’s foreclosure epidemic resulted from the legal mass marketing of dangerous loan products and systematic overcharging of vulnerable consumers Unfortunately, the consequences are hurting everyone, as massive foreclosures reverse previous gains that had been made in homeownership Even worse, the housing crisis has set the entire country back as we deal with the spillover effects of reduced property values, lost jobs, and devastated communities Learn more about the Subprime Market Meltdown and find out about common sense solutions to respond to it Solutions The Latest Federal Legislation Congress is c