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

snigletsniglet
edited July 2007 in Housing Bubble
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...

http://www.markit.com/information/affiliations/abx/history

Comments

  • financefinance
    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.
  • deejayohdeejayoh
    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_98370TJ_98370
    edited July 2007
    CDO tranches are not based on credit quality, but rather on priority of receipt of payment upon default. Big confusion on this.


    Creating CDO tranches
    ..
  • TJ_98370TJ_98370
    Off topic for this thread, but sniglet seems to like Alt-A stories:

    Alliance Bancorp seeks bankruptcy protection

    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....
    ..
  • deejayohdeejayoh
    TJ_98370 wrote:
    CDO tranches are not based on credit quality, but rather on priority of payment receipt. Big confusion on this.


    Creating CDO tranches
    ..

    I'm not sure I understand your point. first paragraph of your link...
    Even though the motives behind the creation of each CDO differ widely, the principles underlying the structuring of a transaction remain similar. At the heart of these principles is the division or slicing of the credit risk of the reference portfolio into different classes, known as tranches. In accordance with its seniority, each tranche enjoys rights and priorities concerning payments generated by its collateral. Alternatively known as a waterfall structure, this is the process whereby in bankruptcy the proceeds from liquidated cash CDO assets will first be used to meet the claims of the most senior, triple-A rated debt tranche. Only then will proceeds flow to the next most senior tranche of notes, and so on.

    so the tranches are rated AAA, Aaa, Aa2, etc. Check the graphic from your link.
    tranchvu2.gif
  • TJ_98370TJ_98370
    edited July 2007
    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.

    Wednesday, July 18, 2007
    News Flash: You Can Get an AAA Rating on Tranches of Junk Loan Pools
  • TJ_98370TJ_98370
    Saturday, May 05, 2007
    MBS For UberNerds III: Credit Risk, Credit Enhancement, and Ratings

    .....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........
  • deejayohdeejayoh
    yes - that's true. I don't think we are in disagreement

    I was replying to Finance's contention that AAA was going up because of a perceived flight to quality.

    What I was trying point out is that pricing for ALL bond ratings had fallen precipitously over the past week or so, and now seem to be rebounding - The timing of which was suspiciously similar to the timing of Bear's liquidation of the two funds.

    My belief is that their distressed liquidation drove down prices, and they couldn't have just had "junk" <=B-rated tranches in the CDOs, otherwise they never would have gotten back as much of the money as they did.

    see this comment from the Big Picture
    As we noted late Monday (WTF is going on in the ABX Markets?), the RMBS/CDO market, as shown in the ABX indexes, are reflecting that "orderly liquidation," as well as ongoing Subprime mortgage risk. 14 of 15 ABX indexes declined to new lows yesterday, according to Markit Group. I have little doubt that CDO traders knew the Bear Stearn's funds were near worthless, and were front-running the liquidation all this week.
  • financefinance
    DJ & TJ - Yes I do fully understand how CDO tranches work, I was just trying to simpilfy the explaination as to often times why AAA bonds increase in price at the same time that riskier bonds decrease in price...however I should have known better than to condense a subject into one sentence, lol.

    Thanks guys for clarifying/confusing he hell out of people...Im sure you did a little of both for some people. It was very accurate.

    My main point now is that it seems that the Subprime matter has been relatively contained and did not "bleed" into Alt-A or other mortgage products as much as most people expected...yet.

    Overall I do believe that they will be impacted, yet probably not likely to the extent of subprime, as the default rate in america has doubled from ~0.4% to ~0.8% from what I saw on the news the other day. How high does the default rate have to go before it starts eating away at the higher quality tranches of CDO's (and yes I know its not a direct relationship between quality of the security in CDO's, yet there is a strong relationship).
  • rose-colored-coolaidrose-colored-coolaid
    finance wrote:
    My main point now is that it seems that the Subprime matter has been relatively contained and did not "bleed" into Alt-A or other mortgage products as much as most people expected...yet.

    I'm sure it's all going to depend on the harmonics or feedback in the system. The same behaviors that got us into this mess will be the same that move us to the next mess. If Tim is right, on his blog post, we'll get a better idea on July 22nd. For now, it's clear that negative trends are accelerating.
  • deejayohdeejayoh
    My main point now is that it seems that the Subprime matter has been relatively contained and did not "bleed" into Alt-A or other mortgage products as much as most people expected...yet.

    I'm not so sure that this conclusion necessarily follows from the facts presented. And the inclusion of additional info would suggest that the "bleeding" is coming fast and furious to Alt-A. Not as dire as the ultra-bears suggest (things rarely are!) but it is certainly getting ugly
    Alt A Loans `Disconcerting,' Jumbos Weaker, S&P Says
    U.S. homeowners with good credit are increasingly falling behind on mortgage payments, a sign lenders have been offering ``higher risk'' loans outside the so-called subprime market, Standard & Poor's Corp. said today.

    Rising late payments and defaults on so-called Alt A mortgages made last year are ``disconcerting'' and delinquent borrowers appear to be ``finding it increasingly difficult to refinance'' or catch up on their payments, S&P analysts said today in a statement. ...

    Alt A home loans are granted to borrowers with generally good credit scores who opt for unusual loan terms or underwriting standards, such as reduced proof of their pay, without enough offsetting positive attributes.

    S&P, one of the two largest ratings firms, is now ``examining how the risk profile clearly increased'' in the Alt A market, it said in a statement sent by e-mail today. ``We will communicate our findings to the market,'' S&P said, in language it typically uses ahead of adjusting its rating methodology.

    ...

    After 14 months of ``seasoning,'' the level of late payments of at least 90 days and defaults on 2006 Alt A mortgages had risen to 4.21 percent, up from 1.59 percent for 2005 loans and 0.81 percent for 2004 loans, S&P said. The firm used data from First American Corp.'s LoanPerformance unit. S&P excluded so- called option adjustable-rate mortgages, whose minimum payments create growing loan balances for borrowers.
    ...
    As of March, delinquencies of at least 90 days and defaults on prime jumbo mortgages in bonds from any year were at 0.41 percent, the highest since November 2003 and up from 0.22 percent a year earlier, according to a June 1 report from Friedman Billings Ramsey Group in Arlington, Virginia.

    For Alt A mortgages, the level rose 2.26 percent, the highest since January 2004 and up from 0.90 percent, the firm said. For subprime loans, the level rose to 11.44 percent, the highest since August 1997 and up from 6.52 percent.

    and check out the The Alt-A Word if you want to see how the market is treating Alt-A loan buyers. Doesn't look like they believe in the "no-bleed" theory
  • bilirubenbiliruben
    You have to start paying closer attention, Finance. Reading Calculated Risk would be a good start.

    Fitch downgrades Alt-A trusts

    Alliance Bancorp, lender specializing in Alt-A loans files for bankruptcy
  • TJ_98370TJ_98370
    AAA Grades on Subprime CDOs May Give Cold Comfort: Mark Gilbert

    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...
  • financefinance
    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.
  • rose-colored-coolaidrose-colored-coolaid
    finance wrote:
    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.

    I don't know that any of us can state for a fact right now whether subprime or alt-A loans are riskier. The subprime loans are known to be bad, but alt-A have received the name 'liar loans' for a reason. The problem is nobody really knows how many of those are because of liars, and how many are because lenders steered qualified borrows towards those more profitable loans.

    Probably the best you can say is that risk of subprime > risk of prime and risk of alt-a > risk of prime.
  • deejayohdeejayoh
    finance wrote:
    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.

    Ok, that clarifies. We are talking about 2 different things.

    W/r/t the imact on credit markets - I'd agree that the impact is not catastrophic. I think some people will definitely lose money on their MBS holdings - but more in the single to low double digit range, not 30, 40 or 50%. However, those that have taken these suckers and leveraged up on them (read hedge funds) will get taken to the cleaners like Bear did.

    The longer term impact is on new credit availablity - These poorly performing mortgages will have the affect of drying up available new funding. Look at what has happened already. 2/28s are for all intents and purposes GONE. Minnesota is looking to outlaw all IO/Neg-Am/teaser rate loans. Per S-Crow's post, new restrictions are going in place around who qualifies. I think we can be reasonably sure Alt-A is going to follow suit shortly. That means 20-40% of available lending vehicles are out of the market. That's definitely going to have an impact on prices.
  • EleuaEleua
    I think we can be reasonably sure Alt-A is going to follow suit shortly. That means 20-40% of available lending vehicles are out of the market. That's definitely going to have an impact on prices.

    That is an understatement.

    Look at all the mortgage programs that have been cancelled in the past two weeks. With secondary markets dissolving, it is going to be next to impossible for most of the new entrants in the national housing market to stay in the game. When they need to refi, they will not be able to do so. Also, who can now afford a newly constructed house? Keep in mind that 1/38 homes across the nation are EMPTY!!!

    This September (which I dubbed "The September of Sellers' Soiled Shorts") is shaping up to be worse than I previously thought.

    Yikes.
  • MatthewMatthew
    Inventory is already sky high. Squeeze out an additional 20-40 percent of potential buyers, that will be catastrophic.
  • EleuaEleua
    Matthew wrote:
    Inventory is already sky high. Squeeze out an additional 20-40 percent of potential buyers, that will be catastrophic.

    Hmmm...where have I heard this before?
  • S-CrowS-Crow
    I know of a handful of folks that were planning on refinancing when their adjustments reset. Problem is, they never planned on the "Fannie Mae and Freddie Mac adjustment."

    Some of these folks are going to be in serious trouble and they don't even know it--unless they receive some marketing from their LO stating that "things have changed, refinance now." Probably that won't work either.

    As Raymond's Dad on the sitcom would say, "holy Crap!."
  • EleuaEleua
    This is HUGE!

    We have destroyed many peoples' ability to buy a house while at the same time put many people in a situation where they are forced to sell under extreme circumstances. These sellers will not become buyers.

    A simultaneous increase in supply, with a decrease in demand is going to crush prices.

    Yikes!
  • mike2mike2
    I can't wait to see some data on how many of last years buyers using nontraditional loans could actually qualify for the same purchase price on a fully amortized loan.

    I'd guess it's less than 1 in 5. Using historical averages, it may be as low as 1 in 50.
  • MatthewMatthew
    Imagine the look on these people's faces when the realize they don't qualify to refi their crappy ARM to a traditional fixed rate mortgage!

    "What do you mean my loan is going to reset at 4 percent higher than it is now, why can't I refi?!?!"

    "I want a golden goose now daddy!"
  • redmondjpredmondjp
    Hey, my neighbor just did another cash-out refi (or a HELOC), the fourth one in five years. What's the problem? He just got suckered into spending $19K of it on new windows from a high-pressure-sales door-to-door window seller (Evans windows, see http://www.vinyl-replacement-windows.co ... .php?t=674). As soon as he gets the $ in his account, it's all but gone in a few months.

    I'm not sure of the exact numbers, but he owes several times the original price of the house when he purchased it back in the 1980s.

    If more people were doing the same as him, our retail economy wouldn't be slowing down as it is right now.

    Come on, listen to the Man, spend, spend, SPEND!

    Saving is SO 1950s . . .


    [and unfortunately, no, I really did not make any of this story up]
  • MatthewMatthew
    Redmonjp,

    But Ben Bernanke says that mortgage equity withdraw (MEW) is not as big of a factor in our economy as is home prices!! Don't you believe Big Ben?!
  • rose-colored-coolaidrose-colored-coolaid
    Matthew wrote:
    Redmonjp,

    But Ben Bernanke says that mortgage equity withdraw (MEW) is not as big of a factor in our economy as is home prices!! Don't you believe Big Ben?!

    Of course! After all, it's not like MEW and high home prices could possibly be related. Unsustainable appreciation on my home in no way allows me to extract equity from it.

    Despite all this, I keep feeling like Bernanke is still a little less evil than Greenspan was. Here's hoping that's true.
  • redmondjpredmondjp
    Matthew wrote:
    Redmonjp,

    But Ben Bernanke says that mortgage equity withdraw (MEW) is not as big of a factor in our economy as is home prices!! Don't you believe Big Ben?!
    Hey, even if Big Ben quit working, it would still be right two times a day (rimshot)! :wink:

    "Thank you, and I'll be here all weekend . . ."
  • snigletsniglet
    The ABX index continued to avoid further declines today (July 31). This marks at least least 3 market days where the ABX has managed to arrest it's hitherto precipitous decline.

    There was a wee bit of slippage on the highest rated tranches, but the lowest categories actually gained a smidgen.

    http://www.markit.com/information/affiliations/abx/history
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