We learn today that giant insurance company Allstate has sued BankAmerica and its Countrywide Financial unit over a bum investment. It seems Allstate bought $700 million of Collateralized Debt Obligations from Countrywide which were backed by residential mortgages originated by the mortgage lender. Allstate believes Countrywide misrepresented the quality of the portfolio.
Well, we don’t know yet the merits of this case – and we don’t know exactly what Countrywide disclosed in the offering documents for this CDO (were these stated-income mortgages? was performance of the mortgages listed in the documents? default rates? delinquencies?) To be sure, Countrywide originated some really bad mortgages and it is entirely possible that some of those made their way into the CDO Allstate bought.
Not too long ago, this would have been the unthinkable: mortgage-backed securities sitting on a bank’s books had a very positive affect. This time, the bank is Wells Fargo. In reporting second quarter earnings today, Wells noted that it only had a $400 million unrealized loss on its securities held for sale portfolio versus a $4.7 billion loss in the first quarter.
One of the big hangups with various plans to jump-start the complex asset-backed securities market is that no one knows how to price the securities because there is little to no trading occuring. This goes for the simpler, plain vanilla mortgage-baced securities (pools of mortgages that back a bond) as well as the more compex collateralized debt obligations (CDOs), which are bundles of these asset-backed securities that are more leveraged and used to back yet another bond.
In the mortgage-backed securities business, there is garbage and then the real garbage. Standard & Poor’s just downgraded 213 tranches of various residential mortgage backed securities, many of which had been Triple-A rated and were now being downgraded to junk. You have to wonder how you go from AAA to junk with no steps in between… Anyway, one issuer, CWABS, had a tranche downgraded to junk because 74% of the mortgages collateralizing this particular class of security were delinquent. That’s three out of every four of those mortgages have gone belly up. And who is CWABS? a special purpose vehicle created by CountryWide Mortgage.
