Trouble in EZ-ville

Submitted by Rich Toscano on December 12, 2006 - 9:28am

Last week, subprime lenders Sebring Capital Partners and the ironically named Ownit Mortgage Solutions abruptly bit the dust due to waning demand for subprime asset backed securities.

Just how much has demand declined? Maybe a lot. The ABX indices measure the price of credit swaps for various grades of recently-issued mortgage-backed securities. Last week, an orderly decline in the subprime ABX index turned disorderly, as indicated by the red line on this chart from the people who track the index:

I don't know enough about credit derivatives to fully understand the significance of all this, but it seems likely that the level of defaults has risen enough to (finally) scare some yield pigs from the trough. If the market for subprime mortgage-backed securities is drying up, mortgage lending will be tighter going forward regardless of any regulations or lack thereof.

Whatever their exact nature, it's clear that cracks are forming under the subprime lending monolith.

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Submitted by powayseller on December 12, 2006 - 12:40pm.

Wow - very interesting. Is that red line broken, meaning that the trades were a little illiquid and jumped down rather fast?

Also wondering when we'll hear about the next subprime mortgage blow-up, and when the first bank bail-out will take place.

Submitted by John from Doom on December 12, 2006 - 1:39pm.

Some stories and comments on Sebring and Ownit sent in by our readers appear in this Dec 11th HousingDoom post. JMF added a couple more links in the comments. I'll second that "wow" comment. That's a pretty impressive graph, and it looks like these weird ABX indices need watching.

Submitted by Diego Mamani on December 12, 2006 - 5:50pm.

Thank you for posting this graph Rich! Very informative.

However, a 4.5% drop is not really "disorderly". The Markit folks can trick people viewing their graph by not having the vertical axis start at zero. That way, they visually exaggerate the drop.

Submitted by sdduuuude on December 12, 2006 - 10:32pm.

4.5% in a year is not disorderly.
2% in a day is.

Submitted by Diego Mamani on December 13, 2006 - 6:15pm.

Duuude, I would tend to agree with your statement. However, keep in mind that few stock market players commit suicide when the DJIA fluctuates by more than 2% in a single day.

Submitted by sdduuuude on December 15, 2006 - 12:30am.

Am I to assume from your post that your definition of "orderly" is "nobody willingly killed themselves" ?

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