Subprime Market

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Global Central Bank Focus
Paul McCulley | March 2007


The Plankton Theory Meets Minsky

http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2007/GCBF-+March+2007.htm

Watching the on-going meltdown in the sub-prime mortgage market, which is triggering a sharp tightening of underwriting standards to these dicey credits, I was reminded of prescient writings by two serious thinkers: Bill Gross and Hyman Minsky. Both narratives go back a long ways, with something that Bill wrote in August 19801 – 27 years ago! – particularly poignant:
 
United States
Will the Subprime Meltdown Trigger a Credit Crunch?

February 12, 2007

By Richard Berner | New York

Soaring defaults signal that the long-awaited meltdown in subprime mortgage lending is now underway, and it likely has further to go. Fears are rising that this so-far idiosyncratic credit bust will morph into a broader, systemic credit crunch as foreclosures rise, lenders grow cautious, and Congressional efforts to rein in predatory lending further choke off supply. A credit crunch occurs when lenders deny even creditworthy borrowers access to borrowing. What are the risks of such a scenario?

http://www.morganstanley.com/views/gef/archive/2007/20070212-Mon.html#anchor4374
 
Here is a link to ABX Indices displayed by Markit.

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

It is interesting to note that the A market has held up pretty well while the B market has dropped, in some cases significantly, but is now off the market bottom. I don’t know if these charts can help in the future, but interesting to look at how these things trade. It would be nice to overlay the charts on the S&P.
 
Thanks 350Z; I appreciate the explanation. :)
350zCommTech said:
Sub prime rates are usually above prime rates for a comparable loan, due to higher risks. That's why lenders came up with 0 down, interest only, negative amortization loans, ...etc. It is thought that these risky lending practices were strictly use by sub-prime borrowers, but Nouriel is arguing that prime borrowers were taking out these types of loans also, hens the 50% number.

Your loan is not sub-prime. Sub-prime borrowers would not qualify for that.
Click to expand...
 
Financial stocks rally, New Century recovers a bit

EW YORK (MarketWatch) -- Financial stocks closed sharply higher Tuesday as buyers reemerged in most sectors following several days of declines. New Century shares were among the biggest gainers, as the troubled subprime mortgage lender rose about 25% at the open, before falling back to end up about 10%.
The move was likely due in part to short covering, as investors who recently borrowed shares and sold them, bought them back at a lower price, and pocketed the difference as profit.
Shares of subprime lenders other than New Century

FMT6.78, +0.89, +15.1% ) also rose Tuesday, after sinking more than 25% in the previous session as investors dumped holdings in an industry rocked by tighter regulation and bad debts. See full story.

New Century shares fell about 60% on Monday, after a large short position had already been accumulated.

http://www.marketwatch.com/news/sto...x?guid={73838DA4-D8D9-4C5F-8951-55E373B270A4}
 
Alt-A are a step above sub-prime. The consensus so far has been that sub-prime problems have not been spreading to Alt-A.


"Mortgage Defaults Start to Spread

by Ruth Simon and James R. Haggerty
Thursday, March 1, 2007


The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.
At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.

The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble."

Read the rest here:

http://finance.yahoo.com/loans/article/102536/mortgage_defaults_start_to_spread
 
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FDIC Orders Fremont General to Halt Subprime Loans (Update3)

By Alison Vekshin and Bradley Keoun

March 7 (Bloomberg) -- Fremont General Corp., the California lender that's trying to sell its residential-mortgage unit, was ordered to halt making subprime loans that consumers can't repay and to correct deficiencies in its commercial real-estate lending.

http://www.bloomberg.com/apps/news?pid=20601103&sid=atgNvzV.UsLI&refer=us

I often wonder if there is a real problem with the subprime loans, or is this the flavor of the week. Seeing lending institutions going under and issuing earnings warnings because of these loans is startling, but will we really see a bank (lending institution) a day go under? You would think that these guys would have some way to hedge the risk.
 
350zCommTech said:
If this is not a dead cat bounce, then I don't know what is. Are people that stupid these days? Especially with the internet and all. This company is about to be investigated and they might be done with the real estate business. Heck, they might be done period.
Click to expand...
[SIZE=-1]
The idiots that are buying New Century(up 30% today) are going to get spanked!
Click to expand...
[/SIZE]
350zCommTech said:
NEW YORK (MarketWatch) -- Financial stocks closed sharply higher Tuesday as buyers reemerged in most sectors following several days of declines. New Century shares were among the biggest gainers, as the troubled subprime mortgage lender rose about 25% at the open, before falling back to end up about 10%.
Click to expand...

Today from Marketwatch:http://www.marketwatch.com/news/sto...x?guid={A1787B0D-8729-44EB-A679-E4FD70CEAB50}

"New Century stops accepting loan applications
Subprime specialist tries to maneuver as financial backers clamp down

SAN FRANCISCO (MarketWatch) -- New Century Financial Corp. said late Thursday that it has stopped accepting loan applications because some of the subprime-mortgage specialist's financial backers are refusing to provide access to financing.

New Century shares fell 4.4% to $3.70 during after-hours trading on Thursday. The stock slumped 25% to close at $3.87 during regular trading, leaving it down more than 85% so far this year."

I'd say the spanking is not yet over. Bend over and prepare for more!:D
 
http://www.bloomberg.com/apps/news?pid=20601109&sid=agBlUfdwU9l8&refer=home

Muhlenkamp Loses Ground in Mortgage-Market Shakeout (Update1)
By Danielle Kost

March 8 (Bloomberg) -- Ronald Muhlenkamp's $2.4 billion Muhlenkamp Fund, which lost value just once in the past 12 years, is getting hurt by the shakeout in the U.S. mortgage market.

Muhlenkamp's mutual fund dropped 4.8 percent since the start of the year, the worst performance of 90 competing funds tracked by Bloomberg that buy shares of companies perceived as being undervalued. The manager counts Countrywide Financial Corp., the biggest U.S. mortgage lender, among his 10 largest holdings.
 
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