Wells Fargo is letting go of $600 Million in unsecuritized loans at 35 cents on the dollar. Take a moment to think about how bad that it is. This isn’t a tranche, this is just a pool of loans.
Even if every single loan went bad they would have to only get 35 cents on recovery. That is after the bank forecloses it will only get 35 cents on the dollar back.
But, actually its worse than that. Typically, we would think of the interest rates for mortgages as being equal to the interest rate on the 10 year Treasury note plus an adjustment for the fact that mortgages are riskier..
I’m not sure exactly when these loans were made but the originator was Accredited Home Loans. If I remember they went out of business well over a year ago, maybe two. Well, in the last year the 10 year Treasury has been at its lowest rate in history.
This implies that, if we forget about about credit risk for a second, the interest rate on mortgages like these should have fallen. Interest rates and bond prices move in opposite directions. So, forgetting about credit risk, the value of the mortgages should have gone up. This implies that we need even less than 35% recovery for the loans to be worth only 35 cents on the dollar.
Its actually even even worse than that when you factor in that the original loans had some risk of default built in.