Soothing Words and a Stock Market Rebound
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“Does the flow of mortgages to the securitization machine slow?” asked Jeffrey Harte, an analyst with Sandler O’Neill. “That’s what I’m most worried about.”
Volume is falling. Production of nonagency mortgage securities fell almost 50 percent between January and February, according to preliminary numbers compiled by Inside Mortgage Finance. The data indicate that new subprime and Alt-A loans fell significantly in February.
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If those numbers are in any way correct, I can't believe anything other than the lending market is collapsing. Recent reports placed Alt-A and subprime as high as 55% of the total market. Funny thing is MBA index is still hovering just above fall lows, and housing sales haven't really stalled. However, the major changes in lending won't show up until Feb sales numbers hit later this month.
Quote:
One gauge of the subprime business is an index that tracks bonds backed by subprime loans, the ABX.HE. The index for loans issued in 2006 has fallen sharply in two months. Its price is used to calculate the cost of insuring the bonds from losses.
On Tuesday, the cost to insure a low-rated, “BBB-” portion of the bonds jumped to nearly $1,983 for $10,000 of bonds, from $1,641 on Monday and $410 at the end of December, according to the Markit and CDS IndexCo. The index, which was little changed yesterday, tracks the performance of 20 mortgage bonds, or pools, and provides a snapshot of complex market.
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Basically, if you want to buy low-rated bonds, you cannot get insurance, because the net yields would go negative. Imagine buying a bond paying 6%, but the credit default swap (insurance) costs 20% per year.
A few analysts have stated bids on lower rated securities are falling. Packages with subprime mortgages once got bids around 102. Now, bids are 98 or less. This implies the lenders are selling the loans at LOSS. That isn't a good way to stay in business.
