Tuesday, October 30, 2007

Close-up of One Subprime Mortgage Deal Gone Bad

Fortune has an excellent article about subprime mortgages, with a detailed analysis of a specific $494 million mortgage-backed security (MBS) issued by Goldman Sachs (GSAMP Trust 2006-S3) in 2006 backed by second-mortgages, probably typical of many other MBSs issued by Goldman Sachs, Merrill-Lynch, and other investment banks. Here are some details of the GSAMP Trust-2006 S3 MBS:

Number of individual second-mortgages in Goldman Sachs' GSAMP Trust 2006-S3 MBS: 8,274

Average equity that the second-mortgage borrowers had in their homes: 0.71%

Average loan-to-value of the issue's borrowers: 99.29%

Percentage of loans originated in California: More than 33%

Percent of loans that were no-documentation or low-documentation: 58%

Number of tranches created in the MBS: 13

Number of tranches that were originally investment-grade: 10 (see chart above)

Percent of the MBS originally rated investment-grade: 68%

Number of tranches currently investment-grade: 3

Number of tranches currently in default: 6

Moody's projection of Moody's projection of loans that would default: 10%

Actual number of loans in default in September 2007: 18%

Read the article for more details, it's fascinating.

Bottom Line: Given that most of the original borrowers had no equity in their homes, the only way this story could have turned out positive is if home prices had continued to appreciate. It's also amazing and surprising that Moody's and and S&P could have rated 68% of the issue investment grade.


3 Comments:

At 10/30/2007 3:48 PM, Anonymous Anonymous said...

This is capitalism at its finest.

Everyone in the industry foresaw and discussed the failures that were sure to come.

Not one person above the administrative assistant level can honestly say that she or he didn't fully expect these failures to occur.

Everything is unraveling as expected and so there is no problem.

 
At 11/09/2007 7:10 AM, Blogger Layla said...

This comment has been removed by the author.

 
At 11/09/2007 7:12 AM, Anonymous Anonymous said...

It's pity that such situation can happen. I think mortgages system is good, and needs just some changes and improvements. And of course restrictments should be taken, especially concerning credit history evaluation when clients apply for bad credit mortgage. After such measures I believe situation will change.

 

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