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When 12th Street Talks…

Posted by Larry Doyle on March 3, 2009 11:00 AM |

As I continue to develop the product at Sense on Cents, I will look to deliver a variety of angles and perspectives on the markets, the economy, and the world of global finance. On that note, my friends at 12th Street Capital are willing to allow me to share their insights into the mortgage market.

In the spirit of full disclosure, I have no professional relationship with 12th Street Capital. My brother, Kevin Doyle, works at 12th Street and is gracious enough to allow me to share this commentary with you, my readers. As we look to navigate the economic landscape, I thought this 12th Street piece may prove insightful. While there are some technical terms used in this piece, I do not want to edit and have it lose its integrity. Any questions, please do not hesitate to ask!!

Enjoy….and thank you 12th Street!!

12th Street Capital Market Commentary
1. As the snow blanketed the Northeast corridor, the stock market cratered under the weight of more bad economic news, questions of solvency, investor capitulation, and comments from the Oracle himself. Closer to home in the securitized mortgage market the continued negative sentiment revolving around the economy and the government’s uncertain response to the problems continues to apply downward pressure to just about any sector of the market that still has room to go lower. There was a sizeable list of mostly pay-option super-senior bonds that traded at prices roughly 10% lower than where similar bonds traded 10 days ago. It comes as no surprise that liquidity and risk premium are becoming more and more expensive. Tuesday looks to be a very busy day with no less than 15 distinct bid wanteds. We showed out the first of 5 lists that constitute a $2bln CDO liquidation. Please let me know if for some reason you didn’t see it from us.

2. In the subprime AAA space we have seen a consistent move lower in prices to go along with the payoption seniors. We saw sizeable markets yesterday in ’07 vintage LCF bonds that remain sequential if/when all subordinate bonds are extinguished. The markets were widely shown at 8-00 x 10-00, which represents at least a 2 point drop (or ~ 20% lower price) from 10 days ago. The good news is that it appears there is some retail demand at this level.

3. We remain a proponent of the seasoned Heloc paper as well as certain fixed rate 2nds deals. We continue to seek AMBAC wrapped fixed 2nd lien deals and FGIC wrapped helocs. We also are looking for MTA Basis IO and Subprime 3rd
pay Senior bonds that go pro-rata after the subordinate bonds have been written off.

4. The headline parade continues. The more I watch the politicians (local, state, and federal) throw up against the wall any and all proposals, the less confidence I have in any of these proposals actually taking hold. The two latest revisions: first, the House is now re-considering the Cramdown legislation that would make Chapter 13 Bankruptcy filing only a “last resort” after all voluntary mortgage modifications have been exhausted. Also, California issued a toothless 90 day moratorium on foreclosures, for the ban would not apply to any servicers that have modifications programs in place that target a 38% DTI for borrower payments. I’m not passing judgement on cramdowns or foreclosure moratoriums here as much as I am just plain tired of the politicians grabbing sound bites only to end up missing on the actual delivery.

Thank you again 12th Street Capital!!

LD

  • Petricone456

    Larry,

    If I’m reading this commentary correctly it seems that there is still some bid in the residential mortgage markets for the highest quality mortgage paper (i.e. the FGIC/MGIC wrapped paper) but not so much in more risky paper (i.e. the Option ARM paper). This suggests to me a flight to quality.

    I’ve seen a bifurcation of CDS spreads in the CMBS market whereby AAA spreads have tighthened relative to the lower rated credits where spreads have blown out. This suggests to me a similar flight to quality. Roughly $300bn of commercial real estate mortgages are due in each of the years from 2009 to 2012. Are the climbing delinquencies/losses in CRE loans being reflected in widening of spreads on CMBS likely to deliver jabs our fragile globabl economy can’t stand? Conversely, will a sustained bid in the AAA market for CMBS be enough to inspire confidence in an otherwise tightfisted credit market? Any insight would be much appreciated.

    I’ve heard the adage that the best of loans are made in the worst of times, but I’m not sure what I perceive to be a flight to quality will inspire confidence in the commercial mortgage market and more importantly prevent yet another wave of troubling losses for banks.

    Thanks,
    Matt Petricone

  • Larry Doyle

    Matt,

    From what I understand the higher rated paper does have demand but as the commentary from 12th Street indicates it is at ever lower prices.

    The real concern in the markets is that defaults are going to continue to escalate and can the debt get refinanced. The governnment is trying to restart the consumer finance markets through the TALF.

    The concerns you raise are the same of many investors and analysts.






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