And you are here why?

If you have been in a poker game for a while, and you still don’t know who the patsy is, you’re the patsy. Now, for poker, substitute Finance, and in this case, Mortgage risk. If you’re still doing it by hand, or using complex curve-fitting, etc., well, you’re the patsy. Kay Giesecke from Stanford has   a fascinating paper   where he collected 294 parameters per loan across 120 million loans (from 1995 to 2014), and used this to predict the loan performance via #MachineLearning. The entirely unsurprising result — it beat the pants off of the “traditional methods” (logistic regression, curve fitting, etc. And note, this isn’t simple stuff, it is basically what institutions have been throwing Quants at for years now). The thing is, this is   exactly   the kind of problem that is really hard to model (hence the quants) — there are too many parameters, internal and external, and the differences in performance tends to be more about making the correct guesses ...

Ashwin Parmeshwaram elaborates on something that I have long suspected, viz., the conventional wisdom on "Maturity Transformation" is basically bullshit . First, a definition Why do banks exist?  The conventional wisdom goes like this – depositors prefer to hold liquid risk-free assets and borrowers prefer to borrow for the long-term to invest in risky projects. Banks sit in the middle of this process and perform a sort of alchemy. By performing this alchemy, banks leave themselves open to the risk of bank runs – if all the depositors seek to withdraw their money at the same time, even a bank with otherwise sound loans as assets can go bust. This perceived risk of a bank run is why governments and central banks provide deposit insurance and liquidity facilities to the banking sector, a privilege that is not typically available to other financial intermediaries. In other words,  banks exist for the purpose of maturity transformation. Sounds nice and nifty, right? Bu...

Zillow brings you an interactive map of the U.S. showing you all the underwater homes. And yes, its as frightening to me as it is to you... (Click to go the actual site)

From the Wells-Fargo earnings release they have $64 Billion (with a B ) in "non-strategic" loans on their books. Whats a "non-strategic" loan? Well, its Wells-Fargo speak for " pick-a-pay " loans.  You know, those notorious loans that Wachovia and World Savings (both of which Wells Fargo acquired) hawked where the borrower could - each month - choose to pay the regular payment, interest only, or an even smaller amount (with the rest getting added to the principal). Basically a Bullshit loan. So, to translate, Wells-Fargo has $64 Billion (again, with a B ) of Bullshit loans on their books, which are almost certainly not worth squat, but which Wells Fargo, in its infinite wisdom, has decided to call "non-strategic". Naked Capitalism pretty much wigged out over this too, and came up with a bunch of alternative usages Sorry, your flight is delayed by a “non-strategic” three hours.  I think you should get rid of your “non-strategic dr...

Dan McCrum of FT Alphaville looks at the history of a Countrywide mortgage - read " looks at the sordid history of a crap mortgage bundled by Countrywide into a CDS, and then flushed through the sewer pipes of the collaterization industry ). Its pretty short, but fairly horrific anyhow, replete with fun stuff like Countrywide spends 2007 struggling to raise funding, and ends up in the hands of Bank of America for $4bn in stock. Two weeks before Lehman Bothers files for bankruptcy in September 2008, Mr & Mrs Nadeau miss their first mortgage payment. On October 9, 2008, with due sense of timing, Moody’s downgrades 717 securities related to 71 bundles of subprime mortgages issued by Countrywide. Among them is CWABS 06-6 2-A-3, which drops a notch. A month later the Fed creates Maiden Lane II, which buys a portfolio of mortgage backed securities as part of the bail out of failing insurer AIG for $19.5bn, a little over half of their notional...