sub-prime securities rise: ABX index up on 7/18

[sniglet]

I see that the AAA securities on the ABX index actually rose today, and this is after the announcement that the Bear Stearns mortgage funds are defunct.

Very interesting...

[finance]

sniglet - Having AAA Rated debt prices rise (interest rates decline) is a typical result when lower rated debt (junk bonds, subprime loans) gets sold off (prices decline & interest rates rise). People have to put that money they just recieved somewhere, thus why people tend to put money in safe places after they get burned...hope this helps.

[deejayoh]

lets be clear - those prices rose because Bear Stearns just got finished dumping ~$30 billion of distressed CDOs on the market yesterday.

Given that they only lost 5% of the invested value of the fund, it was clearly not all "Junk". they were selling across all tranches.

[TJ_98370]

CDO tranches are not based on credit quality, but rather on priority of receipt of payment upon default. Big confusion on this.



..

[TJ_98370]

Off topic for this thread, but sniglet seems to like Alt-A stories:



NEW YORK, July 16 (Reuters) - Alliance Bancorp Inc. has filed for Chapter 7 bankruptcy protection and will liquidate, becoming the latest residential mortgage lender to collapse in the U.S. housing downturn.

The company, which has offices in Brisbane, California and Oak Brook, Illinois, listed more than $100 million each of assets and liabilities in its bankruptcy petition, filed on Friday with the U.S. bankruptcy court in Wilmington, Delaware.

Formerly known as United Financial Mortgage Corp., Alliance said it specialized in "Alt-A" home loans....
..

[deejayoh]

[TJ_98370]

DJO:

I think we may be having semantic problems here: Triple A tranches have lower risk because they get paid first. Triple B- tranches have higher risk because they get paid later. Quality of the underlying loan can be totally unrelated to the tranche rating. Correct me if I am wrong.

[url=http://calculatedrisk.blogspot.com/2007/07/news-flash-you-can-get-aaa-rating-on.html]Wednesday, July 18, 2007
News Flash: You Can Get an AAA Rating on Tranches of Junk Loan Pools[/url]

[TJ_98370]

[url=http://calculatedrisk.blogspot.com/2007/05/mbs-for-ubernerds-iii-credit-risk.html]Saturday, May 05, 2007
MBS For UberNerds III: Credit Risk, Credit Enhancement, and Ratings[/url]

.....This allows each tranche to receive its own rating, and the rating of the tranche can be much higher than the rating of the underlying mortgages. As this fact has caused more confusion than nearly anything else I've seen lately........

[deejayoh]

[finance]

[rose-colored-coolaid]

[deejayoh]

[biliruben]

You have to start paying closer attention, Finance. Reading Calculated Risk would be a good start.

[TJ_98370]

July 19 (Bloomberg) -- Bundling mortgages into asset-backed bonds and then agglutinating those bonds into collateralized debt obligations sliced into different flavors of risk always smacked of a sophisticated pyramid scheme. As the foundations crumble, even the apex of the CDO market is looking shaky.

Investors who thought they were boxing clever by buying only AAA rated securities are about to discover that the top grade offers scant protection when a leveraged market melts down.

And the contagion threatens to infect the leveraged-buyout market, the stock market and, ultimately, the real economy...

[finance]

Yes, of course Alt-A is going to be impacted, its going to be more like a slow bleed rather than a gushing wound like Subprime.

Lets say that people with subprime loans are impacted by 25%, then people with Alt-A loans are impacted by 10% & Prime loans by 5% (using numbers as an example and not for factual reasons). Such as a bond with a rating of AA wont have as large of a loss than a BBB bond will if the credit markets deline...

All Im really trying to say is that the Alt-A loans cant have a more negative impact than riskier loans. Will there be carnage in the streets, yes, but it wont take the whole mortgage market down.

The longer the market has to digest the mortgage slowdown the easier it will be to adjust. At this time the market has slowed the bleeding to one area and is starting to slow creap into other mortgage products, just consider ourselves lucky that it didnt just implode across the board...oh wait, some of you do want that to happen.