The position of this blog has been stated several times. Subprime credit is a pig-in-the-python. It got bad very quickly – and it will get better very quickly. The losses on some pools (particularly loans originated in early 2007) will look implausibly large – but 2005 pools will be much tamer.
Prime credit by contrast is deteriorating at an increasing rate and there is no obvious end in sight. It is not able to be modelled. It is very scary.The thinking behind that is detailed here and here.
Wish it were so simple. The prime credit is looking every bit as bad as all that. But the trend in subprime credit is also less clear than a month ago. In some pools (not all) the trends are less good. Short dated delinquency is rising in some places. Losses look a little larger than they might have looked a month ago. The improvement trend was three months old. And one month does not a cycle make – but my level of comfort is falling.
John - am away from my statistics with the kids this weekend, but think it's worth putting in context that prime credit performance was implausibly good for the past 10 years.
Recall that the issue that got Fannie and Freddie in trouble a few years back was underreporting of income -- they'd laid off their losses on prime business from major customers with pool insurance provided by the MI companies at absurdly low rates (who did so to obtain the primary MI business) and were trying to avoid recognizing all the guaranty imcome upfront.
My hope here (and, to the extent I'm talking my book, it's hoping that the green paper in my pocket retains more value than just as green paper) is that the older stats that the agency and MI capital (well, at least their premia) where built on predate late-90s - early 00s performance. Current prime performance can deteriorate 3x just to catch up to the pricing expectations.
I do think the MI companies are all toast from believing they were supposed to be buying mortgage credit risk, but do hope the agencies weren't able to turn the supertanker far enough in 05-07 to hit the rocks.
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