The perceived risk of owning low-rated subprime mortgage bonds surged today after the two largest U.S. lenders reported growing problems stemming from the loans, an index of credit-default swaps suggests.
An index used to create swaps based on 20 BBB- rated bonds sold in the second half of 2006 and consisting of home loans to the riskiest borrowers fell 1.7 percent to about 89.05 today, the lowest since it was created Jan. 18. Before today, the so-called ABX index was down 10 percent since its introduction.
We had the second round of sub-prime mortgage (SPM) problems last week with NEW and HSBC having to restate earnings and increase their loan loss reserve, respectively.
In December we had OWNIT mortgage, Sebring Capital and Mortgage Lenders Network all either close, seek bankruptcy protection or both.
Redfish posted this link that noted Merrill Lynch is calling in some loans:
Merrill Lynch & Co. -- which has been stung by two high-profile subprime bankruptcies in six weeks -- is conducting margin calls on certain B&C originators that receive financing through the firm's warehouse group.
If Merrill is pulling up the liquidity ladder, expect other brokers who financed sub-prime mortgages to do the same.