Securitised subprime — it’s still not doing well.
While synthetic indices like the the ABX and CMBX have partially recovered from lows reached in the spring, non-agency Residential Mortgage-Backed Securities (RMBS) remain in the gutter. You can see some of their performance in the above table from Laurie Goodman over at Amherst Securities.
It’s worth asking the obvious question — why? Here’s Goodman:
Why Declining Mortgage Prices?
We can attribute the initial price decline in Non-Agency securities to several factors.
- (1) Prior to quarter end, we saw higher risk premiums on risky assets across most equity and fixed income markets. However, since quarter-end, the risk premiums have largely disappeared for most asset classes.
- (2) Mortgage technicals—Maiden Lane II selling and other pressures were intense prior to quarter end. These pressures have since evaporated.
- (3) Fears of a deterioration in mortgage fundamentals and a resulting double dip in housing; this is a funny time to focus on this, as the housing numbers generally improve during the summer, than deteriorate during the fall. We would expect another repeat of this pattern.
After an evaluation of these factors, we conclude that there should have been an increase in cash prices after quarter-end, in line with the increase in prices which occurred in other fixed income and equity markets.
In other words, Goodman reckons subprime has now over-sold.
But there’s another reason Goodman mentions to explain the sell-off — fear in the market regarding Greek-exposed European banks selling their assets. Think Dexia, which announced on May 27 that it would speed up the sales of some of its assets, mostly rubbish US MBS, while taking a €3.6bn loss. As we’ve noted before, European banks were big buyers of subprime paper before the crisis.
According to Goodman, with the quarter-end having now passed pressure on Dexia to sell quickly has faded somewhat. More importantly, no other European banks have tried the same asset-selling trick. Yet.
But it’s a not-so-nice example of how interconnected the financial system remains.
The supply! The supply! – FT Alphaville
Maiden Lane puts pressure on MBS market – HousingWire
New strategy – AIG will buy European junk instead of its own – FT Alphaville