Intro, thoughts & Fieldstone latest victim of subprime turmoil

Good morning fellow Blown Mortgage readers! I am very excited to write to everyone today with my thoughts and opinions. First of all, thanks to Morgan for the opportunity to contribute. I look forward to feedback from everyone as we all navigate this “crisis” together.

Hot off the presses! Fieldstone Mortgage Company’s wholesale group has reportedly shut down. Surprise, surprise!

The 10 year Treasury yields dropped to the lowest level since February of 2005 yesterday, ending the day with a yield of 4.08%. Does this mean mortgage rates will follow? Only time will tell.

It appears many of the Wall Street firms are still clueless on how to price some of their more risky mortgage-backed assets. In a perfect world, investment banks with loans on their balance sheets utilize something called “mark-to-market”. This is fairly easy to do with spotless credit borrowers utilizing “prime” loan products deliverable to the GSEs (Government Sponsored Enterprises), commonly referred to as Fannie Mae and Freddie Mac. Further down the credit spectrum, investment banks originate and/or buy “non-conforming” loans, typically any loan that does not meet Fannie Mae or Freddie Mac’s underwriting criteria. When the market for these loan products freezes up, which it appears has happened since this past summer, bankers attempt to value these assets with a method called “mark-to-model”. Mark-to-model is also somewhat of a science, as bankers utilize black box models with historical loan prices to determine asset values. The last layer of loan assets, typically the lowest credit borrowers, are a very difficult bunch to value. Investment bankers utilize the highest form of art to value these assets. This “art” is what I lovingly call “mark-to-make-believe”. Bankers value these assets were they’d like to see the assets priced, in a perfect world. Mark-to-make-believe is becoming more prevalent by the day as we see banks and investment companies throwing out eye-popping write downs of their balance sheet mortgage-backed assets. I relate this “art” comparable to a baseball card investor trying to sell an OJ Simpson football card. He’d “like” to sell OJ’s card for $100, but he just can’t seem to find anyone willing to pay more than 50 cents.

Thanks again for the opportunity. More to come, and I look forward to hearing from you all. Happy Thanksgiving!