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No Subprime Recovery Soon

Lehman Brothers investment note

February 28, 2007

By PATRICK CROWLEY

photo of Patrick Crowley
One of Wall Street’s top investment banks is telling subprime mortgage bonds investors to take profits because the sector’s problems aren’t going away anytime soon.In a research note from asset-backed security analysts from Lehman Brothers Holdings Inc. said now is time to “take profits.”

“On an outright basis, we believe the current valuations at the ABX 06-2 BBB- look close to fair value, and we recommend taking profits on our short BBB-position,” analyst Michael Koss wrote in the note, which Lehman Brothers provided to MortgageDaily.com.

Koss does not expect the pain to be soothed in the near term.

“We expect negative headlines about ratings volatility, originator profitability, and housing fundamentals to continue,” Koss said.

Loan delinquencies of subprime loans are a drag on the sector, a point made by several investment houses and industry leaders in recent weeks.

“While early-stage delinquencies have increased in the prime sectors similar to subprime, the magnitude of the surge is nowhere close to subprime levels,” Koss said.

He added that the “credit fundamentals and originator headlines have driven the short interest.”

“A number of subprime originators have exited the market, been consolidated or experienced significant earnings volatility because of their subprime exposure,” Koss said.

Jim Bulger, president of the Pennsylvania Association of Mortgage Brokers, said in an interview that the subprime market is “starting to correct itself a little bit” after a lending “heyday” over the last few years.

“Some loans in the sector are not performing, and this is a correction,” Bulger said. “The investor is taking a look at what is performing and what isn’t performing.”

Bulger said subprime lenders offer more products than prime lenders and are therefore more exposed to potential problems.

“The strong will survive,” he said. “The market will not go away. It will tighten up, but it will not go away.”

 

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com

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