Mortgage Woes Spread

We have studied balance sheet presentation of securities in Intermediate.  Here is an article about how various mortgage companies like AHM are restating earnings estimates.  I posted this article because it is a great example of how accounting 'estimates' can change which changes E/S (which we are studying now) which changes the stock price which can evaporate the value of options that we are studying now.

Securities which WERE rated A and Baa are now resulting in losses for the holders of those securities.  Gee, sounds like the rating agencies blew that one dosen't it?  So it turns out that the pebble tossed in the pool generates wider and wider circles.  Now stop and think how

the flawed analysis of the rating

is reflected in the downgrade of the securities held which

results in losses since the securities are not paying off to their holders

so the earnings are lower than projected for the holders

which means the E/S is down which means

the denominator of P/E is down

which means that if the P/E is falling so will the stock price

whoops

see how all this ties together?  Cick on the chart at the start of this post to see the real world short term result reflected in the stock price.  Go to www.stockcharts.com and put the other symbols mentioned in the article in to see what is happening to their stocks. 

Comments

[Jason Raper]

"Off-balance sheet accounting and securitization has made it easy for banks, mortgage companies, Wall St. and others to "book" gains that are really air. Perception is not always reality and the veil of opaqueness that has been created in the entire mortgage industry via different classed and tranches of MBS, CDOs, CMOs and the like combined with a system like Mortgage Electronic Registration Systems {MERS} makes it difficult to know who are the real owners of these notes/mortgages and who will take the eventual and proverbial hit upon the collapse. Once an asset is digitized, it provides a ready conduit for fabrication of income, revenue, and cash flow. There is also the potential for cross, double and even triple pledging of collateral [note] in various pools of mortgages. We are only seeing the tip of the iceberg here and government regulators, media and the entire industry needs to clean up this toxic and exotic mess...."

I found this comment on the blog related to the article....sounds a bit like mark to market, or another way to book profits that aren't there. Jason

[Dennis Elam]

Thanks for acknowledging authorship, I was thinking, gee, Jason came up with veil of opaqueness, I am impressed,

Seriously, the possibility of using the same collateral three times raises all sorts of possibilities, all of them dangerous.

Despite the global warming warnings we appear to be surrounded by iceberg tips!

[Robert]

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http://www.whataboutloans.com/mortgage/home-mortgage-lenders.html