A Re-Post: The Subprime Market: "Six-inch Hooker Heels"

[originally posted June 27th, 2007.  This post garnered crazy hits, for obvious reasons.
It seemed a decent post to blow the dust off of and re-examine as Bill Gross was bang on
a year and a half ago.]

The subprime blowout is not over?

So, cruising around today on the RSS feeds and bump into this little beauty of an article on Inman News. Nevermind the icky feeling I get seeing two sumo wrestlers practicing their sport, there is something special about an article that describes how the most recent housing boom was somehow influenced by mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) as “six-inch hooker heels.”

As written about earlier this year on this blog, the subprime mortgage market is like a briarpatch. You may know exactly what you are looking for, but the density and tenacity of the “wait-a-minute” vines quickly cause one to loose track of what it was they went into the briarpatch for in the first place.

The odd thing about the stand out phrase, is that it is not aimed at how attractive the subprime mortgage product was to the consumer….and attractive it was! That descriptor is used to describe how attractive MBS and CDOs were to ratings agencies looking for a better return on their money.

So is the subprime implosion over? A recent discussion with a financial planner at Merrill Lynch revealed they believe it to be overhyped and therefore not nearly as large as predicted. And then there is Bill Gross, the manager of PIMCO, the world’s largest bond fund, and the originator of that wonderful descriptor. Here’s his take on the subprime market from the article:

Gross says that using the current default rate of 7 percent on subprime mortgages — which he says equates to total losses of between 3 percent and 4 percent — “the holders of some BBB investment grade subprime-based CDOs will lose all of their moolah because of the significant leverage.” And if subprime total losses hit 10 percent, he predicts, “even some single-A tranches face the grim reaper.”

At the end of the day, home buyers still have a lot of inventory to look over. Interest rates, while they have shown their desire to inch up, are still near historic lows. This subprime implosion will force lenders to ensure their buyers have good credit and good documentation to back up a mortgage. This all translates into a tightening of the underwriting requirements and a “liquidity constriction.”

For more on this topic or questions about real estate, contact Team366 here.

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