Quantifying Subprime Losses

Next time you see anything about subprime "carnage" or references

to "high-risk loans", remember this. Fremont General has agreed to

sell $2.9

billion of subprime home loans at a net loss of $100 million. The agreement

is the second such deal that Freemont has made: in the first, it sold $4 billion

of subprime loans for a loss of $140 million.

In both cases, the loss is roughly 3.5%. Now I know that bond markets are risk-averse,

but in anybody’s book a loss of 3.5% is hardly the end of the world. In fact,

Fremont shares are up 25% in trading today, as investors realize that the company

does not, after all, risk being wiped out by the "subprime meltdown".

Note: These are real loans, going for real money – billions of dollars.

As such, they’re a much better indication of the health of the subprime market

than the ABX "index", which in fact does not reflect the price of

underlying securities at all, but is rather a traded contract and a volatility

super-magnet.

This entry was posted in bonds and loans, housing. Bookmark the permalink.