The subprime mortgage inventory value is down another 5 % since November 2007.
The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected. The ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments.
The ABX Index has four series (06-1 to 07-2) and five tranches per series. To get a value for the subprime mortgage inventory, one could weight the 20 available ABX values. Hypothetical weights:
06-1 - 35%,
06-2 - 30%,
07-1 - 20%,
07-2 - 15%
AAA - 80%,
AA - 5%,
A - 6.5%,
BBB - 2.4%,
BBB- - 1.1%,
Equity - 5% (marked to zero)
Using the Friday February 2008 settlements (as posted by Markit) for all the available ABX values and the above weights, the subprime mortgage inventory is valued at 64.75 cents on the dollar, down from 69.5 cents as calculated on November 23, 2007. This is a rough estimate and quite imperfect - it assumes weights among the four series themselves and only looks at the subprime mortgages issued since 2H 2005. This number can, however, provide a order of magnitude figure for the value of the subprime inventory.
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