Charts Of The Sub-Prime Contagion
Published July 31st, 2007 in Fixed Income Tags: AHM, american home mortgage, bear stearns, bond market, bsc, credit default swap, credit default swaps, Investech, jim stack, mortgage market, subprime.
The subprime crisis which came to a head when Bear Stearns’ (BSC) funds imploded has now officially spilled over into the rest of the bond market. Take a look at the BBB rated bonds in the mortgage markets:
What looked benign just less than a month ago, has now filtered through the market such that the BBB paper is priced at less than 40 cents on the dollar. As I noted back then the chart for Bear Stearns (BSC) looked ominous but the credit default swaps were showing no real panic in the market.
How much difference a few weeks makes. The credit default swap rate spread has spiked higher than May 2006, when the market last found its most significant bottom.
The poster child for this mess is American Home Mortgage Investment Corp. (AHM) which dropped 90% today to close at penny stock prices.
Here’s another chart (from Jim Stack’s InvesTech) which shows the devastation being wrought in this sector:
Notice how the critical support line (dotted) coincides with the consolidation in the BBB market around 65-70. That is one brutal chart. The only positive thought I can muster is that it looks like most of the damage is over.
AHM, american home mortgage, bear stearns, bond market, bsc, credit default swap, credit default swaps, Investech, jim stack, mortgage market, subprime
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Before we think that there is a spill over, lets wait and see. AHM is merely a conduit, a pass through if you will. Friends of mine at Wells Fargo, a major buyer of AHM paper, explained to us that they felt a disproportionate risk/reward with AHM.
AHM originates the loan and sells them to 1 of 4 major buyers, like Wells before the borrower EVER receives their 1st payment. AHM made a lot of money doing that - goto Google finance and see. All they were was a glorified mortgage broker.
Wells took the stance in a troubled market of mitigating risks and maximizing rewards. Is AHM going to payback Wells for any defaults, no. Because they they are worthless without Wells, JP Morgan, etc….time will tell.