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When will the subprime market collapse?

By February 18, 2007

This article is for commentor EconE, unfortunately it is for NY Times subscribers only, Will Other Mortgage Dominoes Fall? (though someone re-published it online.) It looks at the subprime and Alt-A markets.

It’s amazing how long it can take ivnestors to see that the wheels are coming off a prized investment vehicle. Denail, after all, is a powerful thing.

But when an imperiled favorite happens to be a pol of asset-backed securities – especially those involving home mortgages – denial can be be compounded by outright blindness to the real risks of that investment. That may explain why, even as everyone concedes that the subprime or low-grade mortgage market has fallen into the sea, the vast pools of mortgage-backed securities built in part on those risky mortgage loans still appear to be on solid ground.

The article also mentions a recent study on this subject written by Joshua Rosner and Joseph R Mason. If you’re interested here it is, How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?

The Seattle Times had a related but more consumer oriented syndicated article this weekend, Tighter rules expected in subprime market:

Delinquencies in the $1.3 trillion impaired-credit mortgage market hit 12.6 percent in the latest quarter, up from 11.7 percent. Delinquencies exceeded 13 percent among borrowers with subprime adjustable-rate loans.

Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection.

HSBC Holdings, Europe’s largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home-loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses.

The Seattle Times had another article with some stats in it, Homeowners brace for ARMs’ new rates:

Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.

Last year, ARMs represented 30 percent of all mortgages, according to the national Mortgage Brokers Association. By 2008, it estimates, the number will drop to 18 percent.

So which businesses involved in mortgages are you shorting?