If you read the media, you’ve undoubtedly heard about all of those bad, bad subprime loans made in 2005 and 2006. And if you believe everything that you read in the financial press and from the mouths of any loan originators still doing business in subprime, you also might think that nobody is making subprime loans anymore. Even Countrywide CEO Angelo Mozilo went on national TV not too long ago and proclaimed that his company was “out of subprime.” What you haven’t likely heard is that much of this posturing, at least until very recently, has clearly been as much hot air as substance — lenders tightened their guidelines, sure, but only to a point. Now they’re faced with tightening their belts even further as it’s becoming clear that subprime is gone, and it’s not coming back anytime soon. Case in point: Countrywide, for one, is still offering some subprime adjustable-rate mortgage products that Morgan Brown at the Blown Mortgage blog says are expected to be eliminated from the company’s lending menu on Sept. 28. What this means is that the 2007 mortgage vintage likely will have problems, too — not only because some bad loans were still being funded, but also now because the soft housing market is having a profound effect on all credit and mortgage classes. I’d first called attention to this in a post back in late August, when a report I’d reviewed noted that early payment delinquencies for the 2007 vintage through had already ratcheted up to levels that should have given investors pause. It looks like, unfortunately, I was spot-on: the ABX indices already show that the lowest tranches of the 2007-2 issuance are priced in a similar band close to securities in both the 2007-1 and 2006-2 issuances. And that’s in spite of coupons that are in some cases double that of the earlier vintages in question. (The ABX tracks the subprime RMBS market).
Further, this comes as the 2007-1 BBB- index has hit brand new lows today (2007-1 issuances are generally tied to loans made in the six months prior), signaling anew that the problems with many of subprime mortgage-backed securities have yet to fully resolve.
