We haven’t talked about the ABX in a while, but it’s been heading south again:
Lenders were giving out loans like candy at this time last year. As a result, this Halloween will be no treat for anyone whose fortune is tied to the housing market.
Lenders, investors, builders and borrowers have lost billions of dollars from spiking foreclosures of loans made to borrowers with poor credit.
The losses look set to keep rising.
"The reality is that what’s going on in subprime isn’t going to end anytime soon," said Andrew Lahde, managing partner of Lahde Capital Management, which bets against mortgage-backed securities.
ABX indexes, barometers of demand for mortgage-backed securities, have plunged again in recent weeks. They range from the highest-rated AAA slice of mortgage debt to the riskiest tranches, rated BBB-.
The BBB- tranche from the second half of 2006 was worth just 17.94 cents on the dollar Monday, according to Markit.com. Some tranches eventually may prove worthless.
For those of you who figure that one graph is worth a thousand words, here’s what the second half of 2007 looked like as of yesterday:
Here’s AAA and AA:
Alt A:
And BBB:
When someone tells you the worst is past, don’t believe it. This is going to take awhile.
I know what happened in August.
Does anyone else know what happened in October to make it shoot down like that? I don’t remember any screaming headines.
The resets started in earnest in Oct. It may be an indication of the anticipated increase in write downs.
Or they may have figured out that with declining values they must, at some point, write down the book values of all real estate holdings. Even the ones with very good payment histories.
Or maybe with the understanding that Country Wide is changing the terms, rates, accual loan amounts, there are going to be big loses for the holders of the loans. It may be possible that if what Country Wide is doing works, other mortgage servicers will do the same. If all these subprime loans are reset at lower rates of return or lower loan anounts, those projected profits have to be lowered as well.
Could be something else. I didn’t see any big headlines either.
I suspect it was more attrition than any one big event. There was a lot of talk of a credit market recovery at the end of August, but as JoREMN says, I think people stopped believing the write downs were big enough, that the Fed would save us, or that things would be better in the 4Q. There hasn’t been a big blow-up moment like we saw with Bear Stearns, but we haven’t seen anything resembling good news in a while either.
I drive through a neighborhood where homes on the market that are NOT selling are priced in the low $400,000s. Then I see the foreclosures priced in the high $500,000s to low $600,000s. This phenomenon is in every neighborhood here in Phoenix. When are the lenders going to drop the prices to some value even close to market. How can we take their word on write downs when the value of the assets is unknown? We have not seen the tip of the iceberg on the subprime fallout.
What is happening? End of September was end-of-quarter for a lot of holders of the underlying securities which they did not want to sell because then they would have to mark-to-market instead of mark-to-model. Remember that the Bush Admin even came out in support of the subprime market end of September to artificially boost sentiment and market prices.
Apparently everyone has been trying to get out of the door at once in October… because everyone is seeing everyone else bailing out and nobody wants to be the last one holding on to quasi-worthless pieces of mortage-backed trash.
The logical market reaction? Even less capital available to the mortgage market as a whole at much higher costs, at a time when housing fundamentals keep on weakening by the minute. This means less support for prices given less potential demand for housing, which in turn means more mortgage defaults (either forced or “I sent in the keys honey”) because pessimism regarding future home price evolution increases even further…
It seems that the house that Alan, Benny & the Feds built is crumbling fast. And countering this trend with inflation-inducing Dollar printing through über-low interest rates (M3 money in circulation is increasing a whopping 15 % year-over-year right now!!!) will only lower the purchasing power of people like you and me… and lower our potential for current and future debt repayments even further… which means even more reasons to sell mortgage-backed trash depending on our potential for current and future debt repayments…
To sum it up: we’re housingdoomed
SteveC-
Mr. Twist called an agent about a REO that said “fixer-upper.” [Property was actually in Texas] The exterior picture looked decent enough. The agent was honest with him and said that after going through several inspections, she could honestly say that this would actually be a tear-down, nothing could be done with it. So all of a sudden, what looks like a possible decent price on a fixer-upper, ends up looking like overpriced acreage.
She also said that she knew someone had made an offer on the place, but that the bank was so overwhelmed with foreclosures, it was tough to get a response from them. She doubted the place had sold.
I think there are overwhelmed employees at the lenders who probably spend a lot of time checking Implode-o-meter to see if they are still employed, while working with a reduced staff. It’s hard to be efficient that way.
I’m starting to see more REO auctions out there. I suspect that’s going to be the only efficient way for lenders to get these propoerties off of their books- they obviously aren’t on top of the situation now.
If you want a grim outlook, start tracking the number of lender-owned properties on the Maricopa County assessor’s website. Plug in your favorite major lender, and track how many properties it takes ownership of for a couple of months.
In August, one particular high profile lender had 362 properties in its name. By October 18, that number had climbed to 553. Today it’s up to 625. Ouch!
From what I understand, November is the time that the accounting firms come in and audit the books on Wall Street… So you can mark to myth all you want, but someone has to sign off on it every year.
How much you want to bet that the auditors are scared silly that they have been signing off on a bunch of Enrons for the last 5 years?
The lawsuits are going to be a real treat to watch for the next few years.
Here’s some more scary inter-related repercusions that I just picked up on. If you think you’re safe in money market funds, think again. When they say invested in high quality comercial paper they mean SIV’s. Here’s a couple of links from CNN that give pause.
http://money.cnn.com/2007/10/25/magazines/fortune/funds_sivs.fortune/index.htm
http://money.cnn.com/2007/10/19/magazines/fortune/eavis_boa.fortune/index.htm
I have a money maket mutual fund that switched last year from exclusively invested in u.s. goverment securities to “other” high grade comercial paper. Now I understand what that was about and what we’re on the verge of, way less that 100 cents on the dollar by the time this shakes out. Time to move that money out and back to gov securities. I don’t trust uncle sam ether but all will be lost if he goes bust. And to think this whole mess began in the burbs of Phoenix and elsewhere. We are truely hosed.