I’m confused by how anyone values these CDO’s and I have a feeling that the issuers have no idea either. A typical foreclosure that takes a year to resell will probably result in a 30% loss for that particular loan if it was 100% financing and in a weak RE market. The numbers I’ve seen say that at worst 20% of subprimes go into forclosure. Using that math and assuming the other 80% perform at high interest rates between (8-14%) I don’t see how these guys are losing money. Now some of these funds are being forced to sell the loans for pennies on the dollar. If I had a a few billion dollars I’d love to buy as many subprime loans as you’ve got at the prices I’ve seen quoted. Service the debt for 10 years and rent the houses that the deadbeats default on and collect the high interest paymens on the others. Wait until the next RE upturn and then sell the property you’ve foreclosed on. I’ll bet a guy like Sam Zell is looking into doing something like this.
On another note, credit card debt is also resold in these packages and defaults there run twice as high as mortgage default (4% to 2% I’ve read) and it’s not secured. I’m wondering how the risks and rewards of these two types of debt track each other.
