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Mortgage Credit in 'Quiet Crash': DoubleLine's Gundlach

Thursday, 13 Oct 2011 | 2:04 PM ET

Mortgage credit has been in "a quiet crash” for the past six months to a year, Jeffrey Gundlach, chief executive and CIO of the fixed-income investment management firm DoubleLine Capital, told CNBC Thursday, even as other forms of credit and assets have improved.

Jeffrey Gundlach, founder and chief executive officer of Doubleline Capital LP.
Scott Eelis | Bloomberg | Getty Images
Jeffrey Gundlach, founder and chief executive officer of Doubleline Capital LP.

"It's interesting how with this tremendous bear-market rally in stocks ... and a very big up move in junk bonds in the corporate world — and in recent days emerging-market debt — [have] shared in the rally of credit, but what hasn't shared in the rally at all is mortgage credit," Gundlach said.

In the subprime world the ABX Index, which tracks the performance of different vintages of mortgage-backed securities and is widely used as a barometer for so-called subprime mortgages, "has dropped by over 35 percent in the past year," Gundlach said.

He also noted that in the past week the Markit PrimeX — developed to create a liquid, tradable tool allowing investors to take positions on prime mortgage-backed securities via credit-default swap contracts — has been "persistently weak, and is starting to get some chatter in the blogosphere about just how weak it has been.”

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“PrimeX has been persistently overvalued, in my opinion, since the day it came out,” Gundlach added. "It was really designed to be a prime sibling of the ABX sub-prime index."

He went on to say the housing trend have been pretty much "locked in a stable mood of ongoing defaults, and continued weakness in the recovery rates, particularly when you look at the weaker geographies, those that were financed by subprime and in less desirable locations and lower property values.”


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