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.
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 email@example.com.