Realty Check

Subprimes, C-Bass And My Serious Concerns

What’s the worst business to be in nowadays? No, not Lindsay Lohan’s PR agent. Try a company that buys troubled subprime mortgages, improves collection rates and then sells them at a profit as packages of debt to hungry investors. That might have been a fun business last year; not so much this year.

I’m doing a story today on two mortgage insurers, MGIC Investment Corp., Radian Group Inc., and their little joint venture, C-Bass (Credit-Based Asset Servicing and Securitization, LLC), a New York-based mortgage company. Investors are making margin calls on the company, and it’s killing ‘em. How would you like to have to release this press paragraph:

“MGIC has not determined the range of an impairment charge, although the upper boundary of the range could be MGIC's entire investment, less any associated tax benefit.”

Yipes, would be my professional reaction. The trouble that I’m finding in all these stories, from Bear Stearns on down, is uncertainty. Nobody really knows just how bad it is out there and just how bad it’s going to get. I was talking to Janet Tavakoli, of Tavakoli Structured Finance this morning. “Defaults have been a lot faster than we expected,” she admits. “We're seeing mortgages default before we even hit the coupon resets, and if you tried to liquidate all those mortgages, plus the fact that housing prices have declined. We're combining that with lower than expected recovery rates when foreclosures do happen.”

I know you bloggers always hammer me when I suggest things might be worse than they seem, but just listen for a second: As we’ve already said many times, the bulk of the adjustable rate mortgages that were sold during the height of the housing boom haven’t reset yet, but we’re already seeing defaults on those same mortgages.

This housing boom was also fuelled by an unprecedented number of low-doc and no-doc loans, which means some folks likely fibbed a bit. When we see defaults and foreclosures rising, and the experts say, “oh, it’s just a little piece of the market, barely a blip, most folks are just fine,” well that may be true, but that little blip is causing the value of everyone else’s home to sink, not to mention that it’s simply scaring people out of the market. Foreclosures will rise dramatically in the next six-twelve months. That’s my opinion.

In turn, the banks don’t have time to analyze all the deals they’ve made, they see the data that Tavakoli and I are talking about, they freak, make their own assessments, and make the margin calls. In a statement today, MGIC says:

“While nothing fundamentally has changed at C-BASS, like many other firms in the industry, the current severe state of disruption in the credit markets has caused C-BASS to be subject to an unprecedented amount of margin calls from our lenders. The frequency and magnitude of these calls have adversely affected our liquidity. To address this, C-BASS is in advanced discussions with a number of investors to provide increased liquidity and is exploring all options to mitigate the liquidity risk in this difficult market.”

Good luck with that. Anyone want to buy my old 8-track collection?

Questions?  Comments?