Raghu raises another interesting question about the details of mortgage backed securities. In the "old days" of a decade or so ago, if a borrower defaulted on a mortgage, the bank that issued the mortgage took the house, sold it at auction and received the proceeds. The cost of reselling the house was borne by the bank. If the mortgage has been sold as part of a MBS, who takes ownership of the house when the borrower defaults? Who is responsible for putting it up for auction?
Doug Orr
Date: Tue, 28 Aug 2007 14:28:37 -0700 From: raghu <[EMAIL PROTECTED]> Subject: Re: [PEN-L] a data question about the credit crisis On 8/28/07, Sabri Oncu <[EMAIL PROTECTED]> wrote: > Here are some random thoughts: > > 1) The size of the sub-prime market is between $2 and $3 trillions: this is a > lot by any standard. > > 2) Suppose for a while that the default rate in the sub-prime mortgage market > is 3%. Only this amounts to defaults of $60 to $90 billions, which is again a > lot by any standard: this is at the same order with the amount of foreign money > invested in Turkish Stocks and Bonds. While doing these numbers, we should also remember that a default is not a 100% loss. I'd guess in a bad case (foreclosure+auction), it might be a 25-30% loss. The total losses on the real-estate markets itself may be "only" about $30B or so. The real problem seems to be all the debt that was issued with these mortgages as collateral (and even worse related CDOs; default in underlying mortagages could very well mean almost 100% loss in these instruments). Who knows maybe there is trillions of debt on this collateral. -raghu.
