Subprime Stabilizes

Let’s check back in with the denizens of EZ-Ville for a look at how things are going after the early-December shakeout.

For starters, I wish to address one poster’s comment to assert that I feel completely justified in having called the decline in the ABX "disorderly." The falling-off-a-cliff section of the graph represents a 25% increase in the cost of insuring subprime mortgage backed securities (from 316 basis points to 395 basis points, per this Dow Jones piece among others) in precisely one week. That doesn’t seem very orderly to me.

That said, subprime CDS index price managed to stabilize after the decline and have since begun to ratchet back upwards, as the red line indicates:

Is trouble averted? Was the trouble ever that serious to begin with? As I pointed out in the original post, I don’t know enough about credit derivatives to answer those questions. I do know subprime lenders Ownit and Sebring are still out of business — that couldn’t be good, right?

I continue to maintain that the cracks are forming, for what that’s worth. San Diego County saw 1,181 notices of default in November — almost triple the November 2005 number. And the direction of the trend in defaults and foreclosure sales is decidedly "up." Someday, somehow, the (almost?) unflappable subprime lending market will take note.