Mortgage Bonds Slipping Back to Worst Levels Ever

Posted on June 10th, 2008 in Daily Mortgage/Housing News - The Real Story

Judging by the way the stock market and particularly financials have rallied since Bear Stearns’ collapse, one might think homeowners are doing just fine, houses would begin selling again and the mortgage default crisis has been suddenly cured.

Until just a few weeks ago, stocks of the largest mortgage players and bonds backed by prime through subprime mortgages rallied from their all-time lows set in March. Then all of a sudden, some realized that the markets can’t get better until the housing market shows signs of improvement.

Since March, other than a rise in existing home sales in April, we have seen absolutely no signs of improvement in the housing market, but rather plenty of hard evidence that the crisis continues to accelerate. Oh, and by the way, the spike in April existing home sales occurred mostly in the bubble states. In CA for example, sales increased by 26% while the number of existing homes sold out of the foreclosure inventory was at 38%, leaving ‘organic’ sales at the lowest levels in years.

Additionally, deeply discounted foreclosure/REO sales going off around the nation hurt more people than they help; when a few of these go off in a neighborhood, all homes drop in value. Therefore three people got a ‘great deal’ while 100 people lost $50k overnight.

In a nutshell, reality has returned, the Kool-aide has worn off and everything is crumbling once again with the most risky paper types, like Pay Option ARMs, leading the way. I have often said that the Pay Option ARM implosion will make the subprime implosion look like a bad earnings report. Soon, we will find out. This could be the mother of all bailouts.

Below is a story just released from Bloomberg covering the mortgage bond markets and how they have weakened almost to March levels very recently. -Best, Mr. Mortgage

June 10 (Bloomberg) — Some of the U.S. mortgage bonds at the center of the yearlong credit crisis are slipping toward new lows, as climbing gas prices, unemployment and interest rates deepen concern that homeowner defaults will increase.

The benchmark Markit ABXindex linked to the last-to-be- repaid of originally AAA rated subprime-mortgage bonds from the first half of 2007 fell this afternoon to a mid-price of 50.75, according to a note to clients from RBS Greenwich Capital, from almost 60 on May 19. Top-rated bonds of “option” adjustable- rate mortgages are also dropping, Greenwich, Connecticut-based RBS Greenwich analysts said in a report yesterday.

Subprime Index

The ABX-HE-AAA 07-2 subprime index fell as low as 50.67 in March, suggesting similar prices for similar bonds, and remains above its end of March close. New ABX sub-indexes created last month and linked to the second-to-last-to-be-repaid AAA classes have fallen to record lows for each six-month ABX series, with the latest declining from a high of 70 to 59.25 yesterday.

Pay Option ARMs

So-called super-senior, or the safest, floating-rate bonds from 2006 and 2007 backed by option ARMs, whose minimum payments create growing loan balances, slipped last week to 73 cents to 78 cents for each dollar of principal, according to a report yesterday by RBS Greenwich strategists Desmond Macauley and Joseph Ruszkowski. More-junior AAA classes were at 60 cents to 65 cents, they wrote, while similar securities from 2005 were in the “low 80s.”

In mid-March, super-senior option ARM securities typically were trading at about 78 cents, while more-junior AAA classes were at 55 to 68 cents, according to UBS AG analyst estimates at the time.

To contact the reporter on this story: Jody Shenn in New York at


20 Responses to “Mortgage Bonds Slipping Back to Worst Levels Ever”

  1. Great job, Mr. Mortgage! Thank you.

  2. You have the best detailed housing data of all the blogs.

  3. I really appreciate that Phil!

  4. […] admin wrote an interesting post today on Mortgage Bonds Slipping Back to their Worst Levels Ever. Here’s a quick excerpt: […]

  5. I’m watching this blog with great interest from the UK where we have our very own housing meltdown.

    There’s an article over on Yahoo about the pay option ARM resets in 2009. After reading your thoughts, I’d be suprised if many of these borrowers actually last until then!;_ylt=AofIsvTzbyfeK73mVx1S5tC7YWsA

  6. Three months ago a friend was being pimped by his broker to buy the toxic waste that you are talking about. The broker claimed that he was not able to sell these AAA rate subprime-mortgage bonds himself because of his company’s policy of selling such bonds to retail account holders, but “you could get them from…” The pitch was based on the fact that at a 15% discount the yield was fantastic. Now that this toxic waste is discounted to 65% or less the pitch must be that the yield is even more fantastic. Oh…too bad that you lost 30% or more of your principal in less than three months on triple A rated bonds. Why don’t you by some more so you can double down and improve your average yield?

    This was advice from a major security firm broker who has kids in the same little league team as my friend.

    Popa Behr

  7. I know of someone who refinanced 2 years ago and they now say they only have a few years left on the mortgage until it is paid off.

    I highly suspect she got a 5/1 ARM and basically do not know that it is amortized over 30 years. She is in for a surprise.

  8. I have an old friend who works in the bond market. Last I talked to him was in 2006 and he was making $70K a month. I told him to save most of it as it was going to collapse at some point. He agreed as it was insane. I can’t wait to talk to him again and see how things worked out.

  9. It’s hilarious to see the FED sound hawkish notes right now. Apparently AUG Fed Fund futures spiked today to indicated a much higher possibility of a hike of 25 beeps at that meeting. What a joke. So what’s Ben gonna do: deepen the deflation coming from housing, with a few hikes? The poor guy. He inherited a hornet’s nest. However I do blame him for dragging his feet starting last Summer. He should have kicked things off with lending facilities, not rate cuts. And his rate cuts came slowly, in the midst of market meltdowns. So even now the guy does not understand that you cannot work yourself into these corners, where you are being reactive. Now, those fast cuts are creating new headaches for him. What a mess. He’s obviously going to embark on a jawbone-campaign on the USD, while at the same time having no intention of hiking. Which is only going to set the USD up for a tumble.

    Meanwhile, he’s got the entire financial complex sucking on the FED tit. So, the enmeshment and co-dependency here has risen to new levels.

    Gold has come down again to the 850.00 level on spot. I’m getting back in.

  10. “Bonds are wonderful certificates of confiscation.” I don’t remember who said that but it’s true. You can include US treasury bonds in the lot; the ultimate, the NEC PLUS ultra certificates of confiscation. Cockroach hotel is burning. The bond market needs a good fumigation. Ah! too bad for Lehman and the gang.

  11. “Mr. Mortgage,
    Your exposure of the banks mortgage lending practices impressed me both for your honesty in front of the camera and your willingness to make calls based on demonstrable facts such as actual bank documents. I feel like you are someone I can send this note to.

    “I will start by saying I’m afraid. If my business associates, my younger brother, my daughters or even my now passed mother and father ever heard me say this they would each be shocked – maybe frightened that I would be afraid. But I am. I live inside the beltway in Washington DC. I am a prosperous consultant with a nice income and a 12 room McMansion on a half acre with pool and spa. There is only my spouse and myself at home. For many years we supported an invalid relative who lived with us until her recent death and were in the process of selling our home to buy a smaller one that would still enable us to care for our relative in her final years – she fell and died at age of 90.
    Our Zillow Appraised home is $1,877,000 and the smaller one we purchased was $1,300,000. The fiction of these numbers became clear when the real estate agents started with appraisals on our larger house at $1,250,000. A number recently confirmed by our new tax assessment which dropped $600,000 from last year.

    The new smaller home we closed on is down over $350,000 and our loan payments on both properties take all our disposable income.

    Situational reality has taken me to bk attorneys – $2300 down a rat hole. They know less about Chapter 7 for folks like me than I do. Hell around here they don’t even know how to determine solvency for IRS standards. Their total ignorance on the subject is due entirely to this areas late experience with the credit implosion. How many others like me are out there in DC and Potomac and Fairfax and Greatfalls I don’t know. Maybe there are many All vastly upside down – insolvent not by thousands but by hundreds of thousands and at retirement ages with little chance of recovery.
    My neighbors don’t even know we moved into a 2 bedroom apartment in Arlington – we did it before our credit collapsed due to non payment of the mortgages. I even bought a Honda Fit – after not owning a car for five years and tried to take care of the many other issues soon to be faced when my FICO is closer to 290 than 700 and even using a credit card to book a hotel room will be a problem.
    At some point my family will discover that my retirement hopes are gone and except for what income savings I can hang on to between now and 65 will be all that keeps me and my wife alive along with any social security payments we may have earned along the last 45 years.

    This situation – of our own choosing by the way – we blame no one other than ourselves for not factoring in this horrendous collapse in real estate values – But we have basically lost our most precious possession – not the furniture, the big house or the lost retirement income held in our vanished home equity.
    What we have felt as our biggest lost is a past – a past made of wonderful years together believing if we lived right, saved our money and kept it in real estate then we could imagine a bright future. We have lost that future. How do other people handle this? That’s my question to you Mr. Mortgage.

    When I get up I no longer fill the thrill to start my 6am workout – my 3 mile run and weights. My great health at age 62 now seems sort of pointless. I no longer think of the wonderful country we live in and the great life I have lived even counting those 3 bad years in 68 as an Army Lt. Instead I am just sad.

    Again, thank you for having the guts to tell the truth and make the evidence known. Keep it up and I will keep reading your lines.
    Last of the LT’s.

  12. Also one might ask: What will happen when the paper submitted to the ‘alphabet soup’ auction facilities set up by the Fed is finally returned to the balance sheets of the borrowing institutions?

  13. Anyway, not to worry — the 2nd half housing recovery will being in about 3 weeks.

  14. […] Mortgage Bonds Slipping Back to Worst Levels Ever […]

  15. After reading John smith’s post the reality and real face of this bubble is very much into focus. Here is a person who probably did the right thing his entire life and listened to the experts on how to amass wealth through real estate and keep a portion of your assets there for your retirement. how many baby boomers are now eligible for retirement and who now certainly cant retire as many have lost plenty. The true pain is yet to come. The Generation x-ers who were expecting many retirements from the baby boomers will now have to wait longer for that potential promotion or job as people are not leaving as predicted.My point is look at the many things touched by all these instances involving just mortgages? Who would have thought it.

  16. John Snith – I shot you an email. Comic – totally agree. And they are still rallying behind the very same investment banks who created all of this. This is a top down issue. Consumers are not without blame but the IBs followed by the banks make credit addicts out of everyone. Who is the most at fault, the columbian drug cartels or the drug user. Drug users have to share in responsibility but not at the levels of the cartels. The cartels are executed, the users are given treatment.

  17. by the way, with this recent crash of mortgage bonds, I declare we are in the 3rd inning.

  18. I can certainly understand the concerns/losses/status of those more recent 1st time buyers who purchased in the last three years or so with little or nothing down. True, just about every one of those buyers are upside down today. However, the part I have a hard time wrapping my noodle around, is when I hear people talking about baby boomers in this position with “no equity and no retirement left after the real estate crash”. The best empirical evidence I have is to look at my parents for an example. They purchased the house they currently own circa 17 years ago. They were move-up buyers at that time, and carried over the proceeds from their prior sale as a down payment. They have refinanced a couple of times over the years, but not to make “ATM withdrawals”. The main motivation was typically rate/term driven.

    Cut to present day: yes, their home in southern CA has lost considerable value. However, because they have been homeowners (responsible ones, that is) for so long, the recent drop in home values probably spiked their LTV from about 25% during peak value times, to MAYBE 35% on the high side based on current values. They still have a nice sized chunk of nest egg left in that home.

    So, it always baffles me when I hear about baby boomers who have “lost everything” in the past year or two. Did you get such a late start that you’re more readily likened to the recent 1st time buyer with no money down, or were you simply caught up in the credit-addicted customs of our society and lived above your means? I thought that was an affliction mostly suffered by the younger generations and that most boomers were still relatively conservative when it came to living on credit and above one’s means.

  19. These were the same baby boomers that lost money in the internet boom. This baby boomer generation has no brains. They always do what is popular and do it “en masse”. In the 60’s making revolution was popular. In the 80’s it was silver, gold, commodities. In the 90’s technology was their religion. And in this century their new mantra was real estate. No sympathy for this group. Most of the baby boomers will finish destitute. That’s why they are broke.


    The Alt-A downgrades are accelerating. It’s ugly.
    I wonder what interest hikes by the FED will do to these bonds ?

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