what's the deal with subprime lending?

[sylar]

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You just haven't been paying attention earlier in the year. Tons of defaults, followed by funding sources pulling out, followed by margin calls, followed by liquidating of portfolios at huge losses. Oh, and there are a few Federal fraud investigations taking place for good measure.

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i am sitting here reading up on all this stuff, and reading your responses. thanks for pointing it out. luckily, it appears that NFI seems to have weathered better than most other lenders, but i was definitely missing a lot of stuff.

what is the general consensus? is this area too risky to invest in, or are subprime stocks currently at a nice discount?

[sylar]

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Also here are the main credit default swap indices (ABX) for MBS. Note that it is a price-based index rather than spread based - the lower rated bonds will have lower prices. The 2007 issues have already moved much lower.

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can you explain this a little bit. i am following the link and looking at charts, but i don't know which index i am supposed to be looking at for subprimes or anything (i am assuming BBB's?). also, am i understanding this correctly, this index reflects the average value of a lendor's portfolio?

[Evan]

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what is the general consensus? is this area too risky to invest in, or are subprime stocks currently at a nice discount?

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I don't think any area is inherently "too risky" to invest in. The level of risk in any investment is going to be directly correlated to whether or not you understand what you're doing. Subprimes are pretty complicated businesses. I followed a couple pretty seriously for a few years, did a lot of research in the industry, and I'm still far from an expert. Based on your post, I wouldn't recommend you start messing around with subprime options because you don't seem to have any idea how these securities are priced. However, it's your money and I'm not going to tell you what to do with it.

[pig4bill]

There were a lot of people with mountains of money at risk that couldn't afford to let the subprime industry collapse, which it was well on it's way to doing. It would have started a bloody slide down a slippery slope that would've put a big hurt on the rest of the lending industry. They let out all stops and did everything they could to manipulate and save the most visible stocks, and did a pretty good job of it.

If you look solely at fundys, you wouldn't touch them with a 10 foot pole. But that's not what will drive these stocks for the next year or two.

[SMB]

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Also here are the main credit default swap indices (ABX) for MBS. Note that it is a price-based index rather than spread based - the lower rated bonds will have lower prices. The 2007 issues have already moved much lower.

[/ QUOTE ]

can you explain this a little bit. i am following the link and looking at charts, but i don't know which index i am supposed to be looking at for subprimes or anything (i am assuming BBB's?). also, am i understanding this correctly, this index reflects the average value of a lendor's portfolio?

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Sure -

ABX.HE. are credit default swaps on a package of bonds that are themselves securitized on a package of Home Equity loans. The package of bonds will typically be 20-30 issues of at least $500mm. The different indices represent the separate tranches of these bonds, sorted by credit ratings. As the underlying bonds must be rated by S&P and Moody's (lower score applies), there is an assumption that the underlying securities are relatively liquid for the sector.

The home equity loans packaged into these bonds must have a weighted average FICO score of <660. So, they are all subprime, but BBB- will be the worst.

The index price generally represents a close indicator of value on this portfolio of assets. However, keep in mind that if you "buy protection" for this index with the 5year maturity, you will run into TVM and inflation/rate risk valuation issues (will affect pricing). Also, if you "buy protection" - you are receiving cash settlement on defaults and payment shortfalls. This isn't free. The coupon listed is the fixed interest rate (bps, annual) that is paid to the seller.

Also, 2007-1 and 2007-2 mean that: series 1 are for Home Equity loans written in the first half of 2006 (and so forth).

[hawk59]

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There were a lot of people with mountains of money at risk that couldn't afford to let the subprime industry collapse, which it was well on it's way to doing. It would have started a bloody slide down a slippery slope that would've put a big hurt on the rest of the lending industry. They let out all stops and did everything they could to manipulate and save the most visible stocks, and did a pretty good job of it.

If you look solely at fundys, you wouldn't touch them with a 10 foot pole. But that's not what will drive these stocks for the next year or two.

[/ QUOTE ]

Is this post for real, it is ridiculous? Manipulating stocks isn't going to change anything with the ABS performance which is where the money is at risk, and where big wall street banks HAVE lost lots of money this year. Guess you also didn't see that the big players with lots of money at risk put loans back to the originators and forced some to raise more collateral, which are the very things that precipitated many of the bankruptcies and large hits to book value.

[pig4bill]

[ QUOTE ]
[ QUOTE ]
There were a lot of people with mountains of money at risk that couldn't afford to let the subprime industry collapse, which it was well on it's way to doing. It would have started a bloody slide down a slippery slope that would've put a big hurt on the rest of the lending industry. They let out all stops and did everything they could to manipulate and save the most visible stocks, and did a pretty good job of it.

If you look solely at fundys, you wouldn't touch them with a 10 foot pole. But that's not what will drive these stocks for the next year or two.

[/ QUOTE ]

Is this post for real, it is ridiculous? Manipulating stocks isn't going to change anything with the ABS performance which is where the money is at risk, and where big wall street banks HAVE lost lots of money this year. Guess you also didn't see that the big players with lots of money at risk put loans back to the originators and forced some to raise more collateral, which are the very things that precipitated many of the bankruptcies and large hits to book value.

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What? Translation?

Many of the bankruptcies? Who went BK besides New Century? LEND, FMT, FICC, etc all got bailed out/saved.

[hawk59]

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[ QUOTE ]
[ QUOTE ]
There were a lot of people with mountains of money at risk that couldn't afford to let the subprime industry collapse, which it was well on it's way to doing. It would have started a bloody slide down a slippery slope that would've put a big hurt on the rest of the lending industry. They let out all stops and did everything they could to manipulate and save the most visible stocks, and did a pretty good job of it.

If you look solely at fundys, you wouldn't touch them with a 10 foot pole. But that's not what will drive these stocks for the next year or two.

[/ QUOTE ]

Is this post for real, it is ridiculous? Manipulating stocks isn't going to change anything with the ABS performance which is where the money is at risk, and where big wall street banks HAVE lost lots of money this year. Guess you also didn't see that the big players with lots of money at risk put loans back to the originators and forced some to raise more collateral, which are the very things that precipitated many of the bankruptcies and large hits to book value.

[/ QUOTE ]

What? Translation?

Many of the bankruptcies? Who went BK besides New Century? LEND, FMT, FICC, etc all got bailed out/saved.

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It's not just the public companies, private originators securitized tens of billion of loans as well and many went bankrupt, but again the money is not at risk in the equity of companies it is at risk in the asset backed securities. There are stories in the WSJ at least once a week about how a big hedge fund or Wall St bank lost a few hundred million on subprime, their losses had nothing to do with subprime lender stock prices.

[hawk59]

check out subprime articles today in WSJ, pages b1 & c1

[AggroFish]

http://ml-implode.com/

Guess I should add that it's NOT a Rickroll.