HOUSING DERIVATIVES

Housing Derivatives - Sub-Prime Share

The Nouriel Roubini blog states today that 50% of mortgage originations in 2006 were sub-prime, accounting for 13% of the stock of U.S. mortgages outstanding.  This leads to the calculation that 6% of all homeowners are sub-prime borrowers.   He expresses a housing market prediction:

"... All this means home prices headed sharply south in the months ahead.  As I argued last summer... this is the worst housing recession in the last five decades...."

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

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CME Housing Options - 2008 Trades

Today, for the first time, CME housing options traded for expiration in 2008.  Over $2.6 million of notional Los Angeles housing traded as call options that expire on February 26, 2008.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

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Housing Derivatives - Jan 07 New Home Sales

January 2007 new home sales dropped 16.6%.  This was the sharpest drop-off in this figure since January 1994.  The West region saw the largest decline at 37.4%.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

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Gartman on Housing 4

Dennis Gartman, commodity trading supremo and author of The Gartman Letter, weighs in on tightening mortgage lending standards:

"We guess the folks at Freddie Mac were lost in committee meetings that went on for hours, and days and weeks and perhaps months, but finally Freddie made the decision that should have been made a year or more ago. Freddie's now famously decided that the various "ugly" loans that have required borrowers not to tell the mortgage banker involved of their incomes, nor divulge their employment history, nor make material downpayments, nor have equity in the house in questions. These "toxic" loans were bad... horrific... ugly... and we think perhaps at times immoral, but the public wanted them; demanded them, and were quite willing to embrace them. Now, the toxic mix is on everyone's radar screen... including Freddie and Fannie Mae's' managements.

"Now, long after a nuclear critical mass of these mortgages are out there in the market place and on the balance sheets of so many banks and other financial institutions, the leadership of the companies that led the underwriting efforts have said that perhaps 'tis better to for everyone involved if they were to tighten underwriting requirements. indeed, it is worse than this. They are not going to require these new underwriting requirements until September of this year. The "dog" has long ago left the yard; the door was long ago left open. Out on the high plains of Texas, which are flatter than any place we have seen in our lifetime, it is an old saying that one can see one's dog running away there for days. The "dog" of poorly underwritten mortgages are out there on the horizon... days out of the barn, and he ain't comin' back."

The change in mortgage lending guidance will most likely decrease the pool of available housing buyers. 

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

housing derivatives CME housing futures hedging case-shiller index

Housing Derivatives - ABX New Lows

All tranches of the ABX Index, credit-default swaps based on bonds consisting of sub-prime mortgages, fell today.  The lowest tranche of the 2007 series, ABX-HE-BBB- 07-1, settled at 62.25%, another 5% lower.   

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

housing derivatives CME housing futures hedging case-shiller index

Housing Derivatives - Existing Home Sales - January 2006

The NAR reports a jump in existing home sales today (H/T Calculated Risk).  Of note is the rise in total housing inventory, up 2.9%. 

Freddie Mac announced today that it will stop buying sub-prime mortgages and securities that are likely to foreclose (i.e., cutting off no-doc income), thus shrinking part of the housing demand pool. 

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

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S&P/Case-Shiller Index - December 2006 Release

Today, the December 2006 Case-Shiller Indices were released.  The indices fell sharply month-on-month.  Miami is the bright spot, making an all-time high.

		S&P/Case-Shiller Index
		Nov 06	Nov 06 R	Dec 06	Nov v Dec	Nov v Dec
Bos		172.61	172.60	170.32	(2.28)	-1.3%
Chi		168.18	168.16	167.58	(0.58)	-0.3%
Den		137.65	137.65	137.11	(0.54)	-0.4%
LV		232.56	232.56	231.57	(0.99)	-0.4%
LA		273.05	273.05	270.03	(3.02)	-1.1%
Mia		280.30	280.30	280.87	0.57	0.2%
NY		212.99	213.59	212.47	(1.12)	-0.5%
SD		242.11	242.11	238.07	(4.04)	-1.7%
SF		213.84	213.84	212.13	(1.71)	-0.8%
WDC		242.04	242.26	240.28	(1.98)	-0.8%
Comp		223.58	223.76	222.01	(1.75)	-0.8%

		CME Housing Expiration Convergence
		Feb 07 Futures	Dec 06	Index vs Futures
		Final Settlement	INDEX *
Bos		171.20	170.32	(0.88)
Chi		167.80	167.58	(0.22)
Den		137.40	137.11	(0.29)
LV		232.60	231.57	(1.03)
LA		272.80	270.03	(2.77)
Mia		280.00	280.87	0.87
NY		212.00	212.47	0.47
SD		240.40	238.07	(2.33)
SF		212.60	212.13	(0.47)
WDC		239.60	240.28	0.68
Comp		223.20	222.01	(1.19)
		* The S&P/CSI for December 2006 settles the February 2007 CME housing futures

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

housing derivatives CME housing futures hedging case-shiller index

Housing Derivatives - ABX Sliding

The ABX Index is a program of credit-default swaps on sub-prime mortgage bonds that offer payments to buyers of protection if the securities aren't repaid as expected.  New series of ABX indexes are created every six months by securities firms (07-1 equals H1 2007).

The ABX Index for the BBB- tranches settled on new lows: the 06-2 at 76.88% and the 07-1 at 67.27%.  The 07-1 vintage that started trading on January 18, 2007 was at 90.61% twelve trading days ago.  The ABX-HE-A 07-1 tranche settled at 92.50% and the highest tranche, the AAA 07-1, settled at 99.15%, both new lows.

Bloomberg recaps some of the metrics for this market.  Sub-prime mortgages made up about 20% of all new mortgages in 2006.  About $824 billion in securitized sub-prime mortgages are outstanding, representing about 11 percent of total U.S. mortgage debt.  Alt-A mortgages, those that fall shy of Fannie Mae and Freddie Mac standards and made with no income docs, investor purchases or interest-only and "option" ARMs, represent about $722 billion, 9.3 percent of total U.S. mortgage market.

This sub-prime mortgage market deterioration will affect the prices for U.S. housing. 

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

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ABX Index and Housing Derivatives

The ABX Index for ABX-HE-BBB- 06-02, the lowest tranche of the series, settled Friday at 69.39%. This is a new low.

The ABX has been receiving a lot of attention outside of its professional dealing community over the last several weeks. HousingDerivatives has been following this index since December 2006 because the ABX Index is an important, publicly available metric of the financial health of the mortgage lending market. Many sub-prime loans having been issued in 2005 and 2006 in states and cities. The ABX Index assists housing derivatives traders in evaluating the housing supply/demand dynamics. For more ABX information, see Markit's site.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

housing derivatives CME housing futures hedging case-shiller index

Housing Derivatives - ABX Sub-Prime Index Gapping Lower

The decline in values of the ABX index for sub-prime mortgages has been a powerful housing derivatives story since late December 2006. The ABX index for sub-prime mortgages is still falling in value. Today, the ABX-HE-A 07-01 settled 94.22% and the BBB- 06-02 settled at 72.71%, both new lows.

The ABX-HE-BBB- 06-02 tranche had been ticking steadily lower since a 95.25% settlement on December 29, 2006. Over the last 30 days, the index for the BBB- tranche has ratcheted down to the 72.71% level. (It lost 15% points in the last 17 trading days.) Of interest will be how the A tranche will fare.

Calculated Risk cites a Bloomberg story with a devastating quote about where the BBB- ABX tranche value can go to. The result will lead to the CME housing futures contracts, particularly those cities that are in high sub-prime mortgage areas, to react to the potential credit squeeze that may decrease housing buyers and increase housing inventory. The severity of the sub-prime mortgage deterioration may lead to distress cash housing transactions.

MaxedOutMama has an excellent examination of the mortgage market going forward and a California analysis that may affect CME Los Angeles and/or San Diego futures contracts.

All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading.

housing derivatives CME housing futures hedging case-shiller index