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Stay on the sidelines during subprime collape

Posted Mar 19th 2007 3:15PM by Eric BuscemiEric Buscemi RSS Feed
Filed under: Industry, New Century Fin'l (NEW)

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Barron's did a great job attacking all the angles associated with the subprime mortgage collapse over the weekend. Below are some of the interesting data points:
  • Subprime woes are spilling over to the prime adjustable-rate-mortgage (ARMs) market. Delinquencies for Prime ARMs are now at levels seen in the 2001 US economic recession.
  • $400 billion in ARMs are scheduled to be reset during 2007 -- with few being able to be refinanced, according to an analyst.
  • Collateralized debt obligations (CDOs) market might not have seen the full impact of the subprime collapse. This market still has to be tested as to its ability to stand up in the mortgage-market downturn.
  • The growth of CDOs investing in the subprime mortgage market has increased from $9.9 billion in 2001 to $114 billion last year.
  • The total size of the subprime mortgage market approximates $1.0 trillion.
  • The subprime mortgage market makes up 15% of the total mortgage market.
Reviewing the above data and the linkage between subprime mortgages and CDOs -- and the growth in these businesses during the past few years -- points to a classic house of cards that needs to unwind. Also, Congress has come down hard on Fannie Mae and Freddie Mac during the past few years, so these government sponsored organizations are not going to be there to support this market. Therefore, this liquidity crisis could last for a while.

Let the big boys battle it out for a while. Typically, after an industry implodes there is plenty of time before a broken industry fixes itself.

Tags: barron's, barrons, collapse, industry, mortgage, subprime

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