Monday, July 16, 2007

I'm boring

I'm on the same topic again, the state of the mortgage backed security market as represented by the ABX indices. Ok, I missed the stock market prediction last week. Oops.

But look at the A rated ABX index. Please note, a new Y axis versus last week. The close was 69.35 (not updated on the graph headings until the next day). My last post had this at 81.5 cents on the dollar. In round numbers, A rated CMBS bonds dropped 15% in one week. OUCH!

Every tranch of CMBS is falling fast. AAA rated went from 97.31 to 95.53 today. (OUCH! Those bonds have poor yields due to their "safety.") BBB and BBB- are trading below 50 cents on the dollar. Must suck to have an investment like that hedged. Let's see... 6 times a 50% loss is... Ummm... officer, *that* Mr. Smith is over there (broker bolts for exit).

Anyone who says we haven't seen the darkest days hasn't contemplated what it will be like to get a mortgage come September 1st. Oh... the impact will be less than I imagine... The implode-o-meter will not stay stuck at 99 for very long. ;)

Got popcorn?


arroyogrande said...

I hear ya, brother Neil. Like slow motion dominoes, how each tranche is falling, one by one, in the same pattern.

But then again, we all know the truth...that the only difference between sub-prime and alt-a is that one, little, single-point-of-failure FICO score. What's the ABX equivalent for Alt-A? It should be interesting to watch in the coming months.

- arroyogrande

arroyogrande said...

Oh yeah, also realize that the ratings agencies that rated all of this financial sausage knew that their ratings models could blow up, but were somehow, ummm, blindsided?

Absence of Fear, by Robert L. Rodriguez, CFA

"We have witnessed an explosion in the size and types of securitizations, with mortgage securitizations leading the way. We were on the March 22 call with Fitch regarding the sub-prime securitization market's difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions. "What are the key drivers of your rating model?" They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years. My associate then asked, "What if HPA was flat for an extended period of time?" They responded that their model would start to break down. He then asked, "What if HPA were to decline 1% to 2% for an extended period of time?" They responded that their models would break down completely. He then asked, "With 2% depreciation, how far up the rating's scale would it harm?" They responded that it might go as high as the AA or AAA tranches."

Notice the reliance on only TWO pieces of data:

1. The FICO score.
2. The *ahem* "fact" that house prices always go up.

In other words, there was ZERO default risk (according to their models).

Ruh roe!

- arroyogrande

wannabuy said...


It will be interesting to see what happens with alt-A.

Zero default risk... market meet reality, reality is going to kick the market's A**.

Its slow... Some people are holding on to denial well. That will just shift jobs. :( Cest la vie.

Got popcorn?

Justin said...

Neil's quote:

"The implode-o-meter will not stay stuck at 99 for very long. ;)"

It 100 today.

I am so glad I found this blog.
sorry it took so long to find it.

Justin a.k.a. Anti-Lance