US subprime loans face trouble
US subprime loans face trouble
By Saskia Scholtes, Michael Mackenzie and David Wighton in New York in New York
Copyright The Financial Times Limited 2006
Published: December 7 2006 22:40 | Last updated: December 8 2006 00:53
The failure of a small Californian mortgage lender on Thursrday increased nervousness in the credit derivatives market about the large number of US “subprime” mortgages extended this year.
The cost of insuring against default on securities backed by subprime mortgages rose after Ownit Mortgage Solutions, in which Merrill Lynch has a 15 per cent stake, closed its doors.
Its failure is the latest in a series of ominous developments in the market for subprime mortgages – higher interest loans made to borrowers who are seen as risky because of payment problems or large debt burdens.
There has been a sharp rise in the number of borrowers behind on their payments. The loans are often packaged into securities and sold to investors to help lenders reduce risk.
In recent years, this area has been one of the fastest-growing parts of the market for mortgage-backed bonds. So far in 2006, $437bn of such securities have been issued in the US.
The securities have been big business for investment banks which have been buying up mortgage lenders to ensure a continued supply of loans. Merrill last year bought a stake in Ownit, which made $5.5bn of loans in the first half of 2006. Ownit closed down this week after JPMorgan Chase, its main lender, cut off its funding.
Hedge funds and big investors have been using the derivatives market to bet against securities that are backed by subprime mortgages. This activity is measured by the ABX home equity index, in which the cost of credit insurance gives an implied price for the underlying bonds.
As measured by the ABX index, the implied price for bonds backed by 2006 subprime mortgages has fallen dramatically in recent weeks.
“Market opinion is clearly grounded on a fairly negative view regarding the fortunes of the bonds backing the ABX [index],” said Gyan Sinha, mortgage strategist at Bear Stearns.
He said problems are pronounced for bonds backed by 2006 mortgages, which cost almost 100 basis points more to insure than bonds that are backed by 2005 mortgages.
Other signs of weakness include higher delinquency and foreclosure rates for 2006 vintage bonds.
Moody’s put a handful of 2006 subprime deals on watch for downgrade – the first negative ratings activity for bonds originated in these years.
HSBC, the third-biggest bank, has announced bad debts are rising in its US mortgage business.
By Saskia Scholtes, Michael Mackenzie and David Wighton in New York in New York
Copyright The Financial Times Limited 2006
Published: December 7 2006 22:40 | Last updated: December 8 2006 00:53
The failure of a small Californian mortgage lender on Thursrday increased nervousness in the credit derivatives market about the large number of US “subprime” mortgages extended this year.
The cost of insuring against default on securities backed by subprime mortgages rose after Ownit Mortgage Solutions, in which Merrill Lynch has a 15 per cent stake, closed its doors.
Its failure is the latest in a series of ominous developments in the market for subprime mortgages – higher interest loans made to borrowers who are seen as risky because of payment problems or large debt burdens.
There has been a sharp rise in the number of borrowers behind on their payments. The loans are often packaged into securities and sold to investors to help lenders reduce risk.
In recent years, this area has been one of the fastest-growing parts of the market for mortgage-backed bonds. So far in 2006, $437bn of such securities have been issued in the US.
The securities have been big business for investment banks which have been buying up mortgage lenders to ensure a continued supply of loans. Merrill last year bought a stake in Ownit, which made $5.5bn of loans in the first half of 2006. Ownit closed down this week after JPMorgan Chase, its main lender, cut off its funding.
Hedge funds and big investors have been using the derivatives market to bet against securities that are backed by subprime mortgages. This activity is measured by the ABX home equity index, in which the cost of credit insurance gives an implied price for the underlying bonds.
As measured by the ABX index, the implied price for bonds backed by 2006 subprime mortgages has fallen dramatically in recent weeks.
“Market opinion is clearly grounded on a fairly negative view regarding the fortunes of the bonds backing the ABX [index],” said Gyan Sinha, mortgage strategist at Bear Stearns.
He said problems are pronounced for bonds backed by 2006 mortgages, which cost almost 100 basis points more to insure than bonds that are backed by 2005 mortgages.
Other signs of weakness include higher delinquency and foreclosure rates for 2006 vintage bonds.
Moody’s put a handful of 2006 subprime deals on watch for downgrade – the first negative ratings activity for bonds originated in these years.
HSBC, the third-biggest bank, has announced bad debts are rising in its US mortgage business.
posted by Carlos T Mock @ 9:11 AM
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