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Mortgage Meltdown Spillover

As the credit crunch continues, the mortgage mess is spilling over from the sub-prime to the prime markets. As Steve Liesman pointed out this morning on Squawk box, the AAA rated ABX Index is at an all time low. The ABX Indexes, by Markit and CDS IndexCo, measure the performance of mortgage-backed securities, or a basket of home equity by degree of risk, AAA being the highest quality issues.


Lack of liquidity in the market is driving the decline. Banks cannot sell mortgage bonds, even those of high quality, and therefore have no capital to sell new mortgages and cannot offset the increased risk of having more debt on their books. Mortgage rates, in turn, have recently gone up despite decreasing interest rates. The spread between the 30-year fixed mortgage and the 10-year treasury has hit an all time high.

As the credit crunch continues, the mortgage mess is spilling over from the sub-prime to the prime markets. As Steve Liesman pointed out this morning on Squawk box, the AAA rated ABX Index is at an all time low. The ABX Indexes, by Markit and CDS IndexCo, measure the performance of mortgage-backed securities, or a basket of home equity by degree of risk, AAA being the highest quality issues.

As the credit crunch continues, the mortgage mess is spilling over from the sub-prime to the prime markets. As Steve Liesman pointed out this morning on Squawk box, the AAA rated ABX Index is at an all time low. The ABX Indexes, by Markit and CDS IndexCo, measure the performance of mortgage-backed securities, or a basket of home equity by degree of risk, AAA being the highest quality issues.


With demand for the bonds grinding to a halt and defaults on the rise, the bond insurers are taking on more and more risk. Ambac Financial is now the worst performer of the S&P 500, down ~65% YTD. MBIA , the largest insurer, is down 34% YTD. With more risk, these insurers are facing the risk of being downgraded themselves which will push the downward spiral even further. If they lose their AAA rating, banks will have to write down even more loans to protect themselves.