Subprime and Alt-A Reading

So this is the week that the mainstream financial media has finally woken up to the collapse in subprime (and shortly thereafter, Alt-A). Why it has taken 2 years to figure this out is beyond me.

Perfectly smart people have been watching every indicator of underwriting quality go far outside of historical norms in 2005/2006 (on the downside) and somehow convinced themselves that it will be OK.

This weekend's best articles:

Marketwatch: Subprime Mortgage Woes May be Spreading

Bloomberg: Subprime Defaults Are `Beginning of Wave,' Bies Says (Note, she still thinks it will stay contained to subprime...sure it wil)

Merrill Lynch: A New Chapter in the Housing Story

Barrons: Subprime Mortgage Bonds Extend Drop as Dealers Cut CDO Funding

"The drop in demand caused yields on subprime mortgage bonds with the lowest investment-grade ratings to double to 8 percentage points over benchmark rates last month, according to New York-based Lehman Brothers Holdings Inc."

NYTimes: Troubles Hit Real Estate at High End

NYTimes: Crisis Looms in Market for Mortgages
1. The beginning of demonization/backlash: no doc loans have become "liars loans". I am sure two years ago they were an "innovative way to improve homeownership rates among non-traditional buyers" or something like that

2. The recognition that Merrill (and soon all the rest) who went and bought subprime origination arms last year are going to lose their shirts on those transactions. "but we can keep the securitization income coming if we buy them" I believe was the logic at the time. My guess is that there was a misalignment in incentive comp metrics that is the culprit here. Keep securitization income up in your division and get a big bonus. If a couple of years down the line, ML has to take a balance sheet charge, well, we are not exactly going to claw back your bonus...
RGE Monitor: These guys are great...There is a 14 day free trial, well worth signing up for, if only to read these three articles:

RGE Monitor: From the current subprime credit crunch to a generalized credit crunch: the incoming financial train wreck

RGE Monitor: Is the Sub-Prime “Garbage” 6% or Rather 50% of the Mortgage Market?

RGE Monitor: US and Global Financial Turmoil: Ten Observations on the Coming Financial and Economic Hard Landing

EDIT: Add this WSJ / New Century "expose" to the list (note: subscription required). Not much new, just color commentary really.

WSJ: At a Mortgage Lender, Rapid Rise, Faster Fall

Next question for advanced readers:
When does the next credit collapse in high yield happen and what does that mean for LBOs?
Barrons: Beware The Credit Bubble

Posted on March 11, 2007 and filed under Finance.