Investors were braced for further turbulence in the US subprime mortgage market yesterday after a spate of negative headlines last week drove a key derivative index for the sector to record lows, prompted a liquidity crunch at a Bear Stearns hedge fund and revived fears about the potential effect of the crisis on the broader economy.
“We expect the recent implosion in subprime indices to resurrect concerns over housing and its impact on the consumer,” said Richard Iley, economist at BNP Paribas.
Joe Astorina, director of securitisation research at Barclays Capital, said: “People are really trying to digest last week’s news and there was certainly plenty of it to go around, whether it was the [Mortgage Bankers’ Association] data or the Moody’s downgrades.”
Data from the MBA last week showed a record number of borrowers were set to lose their homes through foreclosure in the first quarter while delinquency rates on subprime home loans climbed from 11.5 per cent to 13.8 per cent.
Subprime mortgages are home loans made to borrowers with patchy credit histories. Such loans have suffered a spike in late payments and defaults in recent months, causing prices of subprime mortgage-backed bonds to plummet as losses mount.
Douglas Duncan, chief economist at the MBA, said delinquencies would only peak later this year while foreclosures could continue to rise well into 2008.
On Friday, rating agency Moody’s cut the ratings of 131 bonds backed by subprime home loans, citing high levels of defaults and late payments on the underlying mortgages.
Moody’s also said it is reviewing for downgrade the ratings of 247 bonds, including 111 of the bonds it had just downgraded.
The news drove the ABX derivative index, which tracks subprime bonds rated BBB- and issued in 2006, to a record low of 60.95 on Friday. The index was above 97 at the beginning of the year.
The turmoil forced hedge fund managers at Bear Stearns to hold crisis talks with creditors on Monday to keep one of their funds afloat amid investor demands to get their money back and fears that the fund could struggle to meet margin calls from lenders.
Bear Stearns’ High Grade Structured Credit Strategies Enhanced Leverage fund, which invested in bonds backed by subprime mortgages, has suffered heavy losses. Last week, Bear Stearns auctioned $5bn of assets from the fund and a related fund to help assuage its lenders’ concerns.