Measuring the meltdown

2 November 2007 By Martin Hutchinson

That s more than pessimists are talking about, but it s not impossible. Start with the market s expected 50% loss on subprime mortgages. Add in 30% losses on other unconventional loans, and an extra $100bn caused by falling house prices. The sum is a round trillion.

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The ABX index, a series of credit default swaps based on subprime mortgage bonds, (072 series) closed November 1 at 79.94% for the AAA tranche, 48.78% for the AA tranche, 29.94% for the A tranche and 20.39% and 19.11% for two BBB tranches. At 1st October, the price of the AAA tranche was 95.61%, the AA tranche 88.28%, the A tranche 62.78% and the two BBB tranches 40.17% and 37.75%. Thus the average price decline in October was approximately 25% of principal.

The S&P CaseShiller House Price Index was down 5.0% in August from the previous year.

Single family housing starts in the first 8 months of 2007 were 28% below the first 8 months of 2006, while new home sales were down 21.4%. Inventory of unsold homes was 10.0 months in August.

According to the Mortgage Bankers Association, subprime mortgages totalled 13.7% of the $10.8 trillion of US home loans outstanding at December 31, 2006 (approximately $1.5tn). According to RGE Monitor, approximately another $1.5tn of mortgages made in 200506 had negative or no principal amortisation in its initial period.

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