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Nice site i happened on it a few nights ago. Sorry to bother you but i have something you might like to read. I am not a broker or anything, i run a small engineering company here in Liverpool Uk. I do however chat to guys about cars and a week back on guy who runs a Porsche and works in a LARGE bank in New York posted this:-
Existing home sales will bounce around; supply is at record levels and
climbing. The total number of sales doesn't matter if there are many more
sellers than buyers, which there are, and that ratio will continue to
worsen.
The final lenders for sub-prime mortgages are buyers of ABS CDO and CDO^2
debt and they have stopped buying it over the last month, and many have
massive mark-to-market losses that will be realized over the next couple of
months, causing further liquidity drains. The effect of the ABS CDO meltdown
we've been having has not yet hit the end users of the liquidity that these
CDOs provide, the sub-prime borrowers. The collapse (and it is a collapse)
of the leverage which provides home buyer liquidity will be felt of the next
90 days or so which happens to be the peak of the home buying season. We've
just begun to see the servicer/originator bankruptices as a result of
withdrawn liquidity, there are many more to come. The CDOs that got financed
at the tail end of 06 and January/February but were not fully ramped and a
few unaware foreign investors are currently buying paper at these MUCH
cheaper levels and providing the last breath of liquidity now. When they're
done, the liquidity will be virtually all gone as there is basically no new
CDO pipleine and dealers have shutdown the RMBS warehouses until they clear
the risk. Just to put some numbers on it, as of the last couple of days some
hedge funds have been trying to buy credit default swap protection on the
AAA (highest rated) portions of these CDO capital structures at levels as
high as 250 basis points above LIBOR when the same bonds traded at levels as
tight as 40 bps above LIBOR two months ago, and they can't find sellers of
that insurance! Normal long dated AAA bonds trade at LIBOR flat to LIBOR
less. If you are not in the business and don't know what that means, just
imagine the effect on the mortgage market if the Fed raised interest rates
another 2-10%. I say 10% because the lowest rated investment grade debt in
these CDOs trades at least 1000 basis points wider than where it did 3
months ago. This liquidity drain WILL get passed down to home buyers and
they WILL have a much more difficult time getting mortgages, which means
that many fewer will be able to buy homes, right at a time when we have
record supply. That's crash material.
And if you think this is just limited to sub-prime, take a look at the asset
quality in 2006 vintage Alt-A RMBS. It could be argued that it's even worse
than the sub-prime from a lending standards perspective. That shoe is the
next to drop.
At the end of the day, we have never before seen the type of leverage in the
housing market that was pumped into it over the last 5-7 years. That
leverage is what fueled the rapid home price appreciation (HPA) and it is
poorly understood by the majority of market participants who use it as
borrowers and as lenders. That leverage also drove the worst lending
practices that we've seen since the savings and loan crisis. It is widely
accepted amongst the institutional investors who end up financing all these
mortgages that as much as 20% of the 2006 vintage sub-prime will eventually
default. Though the market hasn't priced it in yet, 2005 vintage can't be
that far behind as it only has a 6-9 month HPA cushion which has basically
already evaporated. This is all just beginning to unwind right now after a
relatively small dip in HPA, and the leverage has unwound more rapidly than
anyone expected. This "correction" ain't gonna be minor, and it ain't gonna
be pretty.
Now he was having a row with another guy in Banking, who shut up a lot after reading this, as a engineer i have little idea of what it all means, however i think it means BIG TROUBLE.
Cheers
Mike
Existing home sales will bounce around; supply is at record levels and
climbing. The total number of sales doesn't matter if there are many more
sellers than buyers, which there are, and that ratio will continue to
worsen.
The final lenders for sub-prime mortgages are buyers of ABS CDO and CDO^2
debt and they have stopped buying it over the last month, and many have
massive mark-to-market losses that will be realized over the next couple of
months, causing further liquidity drains. The effect of the ABS CDO meltdown
we've been having has not yet hit the end users of the liquidity that these
CDOs provide, the sub-prime borrowers. The collapse (and it is a collapse)
of the leverage which provides home buyer liquidity will be felt of the next
90 days or so which happens to be the peak of the home buying season. We've
just begun to see the servicer/originator bankruptices as a result of
withdrawn liquidity, there are many more to come. The CDOs that got financed
at the tail end of 06 and January/February but were not fully ramped and a
few unaware foreign investors are currently buying paper at these MUCH
cheaper levels and providing the last breath of liquidity now. When they're
done, the liquidity will be virtually all gone as there is basically no new
CDO pipleine and dealers have shutdown the RMBS warehouses until they clear
the risk. Just to put some numbers on it, as of the last couple of days some
hedge funds have been trying to buy credit default swap protection on the
AAA (highest rated) portions of these CDO capital structures at levels as
high as 250 basis points above LIBOR when the same bonds traded at levels as
tight as 40 bps above LIBOR two months ago, and they can't find sellers of
that insurance! Normal long dated AAA bonds trade at LIBOR flat to LIBOR
less. If you are not in the business and don't know what that means, just
imagine the effect on the mortgage market if the Fed raised interest rates
another 2-10%. I say 10% because the lowest rated investment grade debt in
these CDOs trades at least 1000 basis points wider than where it did 3
months ago. This liquidity drain WILL get passed down to home buyers and
they WILL have a much more difficult time getting mortgages, which means
that many fewer will be able to buy homes, right at a time when we have
record supply. That's crash material.
And if you think this is just limited to sub-prime, take a look at the asset
quality in 2006 vintage Alt-A RMBS. It could be argued that it's even worse
than the sub-prime from a lending standards perspective. That shoe is the
next to drop.
At the end of the day, we have never before seen the type of leverage in the
housing market that was pumped into it over the last 5-7 years. That
leverage is what fueled the rapid home price appreciation (HPA) and it is
poorly understood by the majority of market participants who use it as
borrowers and as lenders. That leverage also drove the worst lending
practices that we've seen since the savings and loan crisis. It is widely
accepted amongst the institutional investors who end up financing all these
mortgages that as much as 20% of the 2006 vintage sub-prime will eventually
default. Though the market hasn't priced it in yet, 2005 vintage can't be
that far behind as it only has a 6-9 month HPA cushion which has basically
already evaporated. This is all just beginning to unwind right now after a
relatively small dip in HPA, and the leverage has unwound more rapidly than
anyone expected. This "correction" ain't gonna be minor, and it ain't gonna
be pretty.
Now he was having a row with another guy in Banking, who shut up a lot after reading this, as a engineer i have little idea of what it all means, however i think it means BIG TROUBLE.
Cheers
Mike
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