divide home mortgages ($10,508.8 billion)

So if house prices fall 25%, lenders and tax payers have to cough up over $2.5 trillion to absorb principal writedowns?

I don't understand how it's possible to do this on a selective basis without making a lot of people really angry.

this whole thing is coming unclued. a 10% decline in a cpdo will cause 90% losses.

LONDON (Dow Jones)--A combination of the rising price of derivatives, which insure investors against corporate defaults, and a fall in the value of debt issued by a large structured investment company, saw ratings on a Constant Proportion Debt Obligation, or CPDO, cut dramatically this week.

Moody's Investors Service said Wednesday it had downgraded Series 55 JPY30 billion REDI Notes, issued by Clear PLC, to C from Aa3.

The deal was structured by Merrill Lynch (MER).

The rating agency said that the net asset value of the deal had dropped below 10%, triggering a "cash out" credit event that could see investor losses "likely to exceed 90%" if the deal is now unwound.

CPDOs issue notes and generate returns by selling default insurance using credit default swaps. They can vary the leverage of their investment according to how it performs over time.

But the credit crisis has driven credit default swap spreads wider, and investors who sold protection when spreads were very tight may be facing mark-to-market losses.

The Markit iTraxx Europe index, which measures the cost of default insurance on 125 investment-grade European corporate borrowers, traded at 142.5 basis points Thursday, a record high, one market participant said.

Moody's said that the widening on the iTraxx Europe index and its U.S. equivalent, the CDX.NA.IG index, had caused the NAV of the swap in the REDI Notes deal to drop to approximately 45%.

In addition, the downgraded CPDO is exposed to the market value of collateral which was purchased with the proceeds generated when it sold notes to investors.

The collateral is a yen-denominated bond maturing in 2022 issued by Sigma Finance Corporation. Moody's said that the market value of the collateral had dropped to around 65%.

Sigma is a large investment vehicle run by London-based investment manager Gordian Knot Ltd. It is similar to some of the Structured Investment Vehicles, or SIVs, that borrow short-term debt to invest in longer-term, higher-yielding assets such as bank debt or mortgage-backed bonds, although Sigma doesn't have the kind of market value triggers that have forced some SIVs to be restructured.

Moody's said that the use of this type of collateral wasn't a feature of other CPDOs that it rated.

"In most CPDOs, the initial investment, valued at par or 100%, goes into a cash deposit at the bank that executes the credit default swap, and the NAV of the vehicle is 100, plus or minus the mark-to-market value of the derivative," Gareth Levington, managing director, structured finance at Moody's in London, told Dow Jones Newswires Thursday. "In this case, for the purpose of the cash out test, the NAV was the value of the Sigma bond plus or minus the derivative. So as the bond traded away from par, you needed less mark-to-market movement to reach the cash out trigger."

The first CPDOs were one of the most talked-about innovations of the credit bull market, thanks to their ability to pay investors a high coupon while securing triple-A credit ratings. But the credit crisis has put the long-term future of the product in doubt.

"CPDOs are still under pressure given elevated investment grade index levels," said strategists at UniCredit in Munich in a note Thursday.

They said that some CDPO notes were trading below 25% of the price at which they launched, suggesting that "to some speculative investors this appears to be an opportunity."

A spokesperson for Merrill Lynch declined to comment.

-Mark Brown, Dow Jones Newswires; +44 (0)207 842 9485, mark.brown@dowjones.com

Dow Jones Newswires

03-06-08 1445ET

What's the source for the valuations of the mortgaged (and unmortgaged) residences?

Whatever the nationwide figure is, it is clear there are large swaths of California (and FL, AZ, MA, MI, NV...)where the majority of "homeowners" are deeply underwater on their mortgages.

Greg,

Thanks for the good homework. You da man!

Thanks CR.

I think that the credit crunch may have more impact on MEW than the actual loss of equity...

unless that loss becomes enormous.

Sebastian, living in Libya Hill, circa October 1929.

You Can't Go Home Again!

Ref Freakdog
All loans are paid off either by the borrower or the lender. It looks like the lenders are going to eat these losses.

Sebastian, mortgage lending increased up to ONE TRILLION DOLLARS per year during the 3 peak boom years.

For 2007 we saw that it's now back down to ~$600B/yr -- 2002 levels -- and still falling.

When you throw ONE TRILLION DOLLARS at a market, prices are going to zoom to the moon.

When you take away the bubble money, prices HAVE TO fall back down to earth.

Earth being pre-bubble valuations. In some areas, this is really, really going to hurt. Millions of people. In other areas like where you are in BFE, not so much.

Sebastian's 8 year performance is pretty dismal. Just paying down a 30yr fixed for that long plus the 5% down is 15% of the 36% equity. The other 21% is something like 2.5% per year. There were periods over the last 8 years when I had months like that.

flamina,

He referenced and provided a link to the statistics in the American Community Survey. Look them up for yourself. Once you see the data, it will be "self-evident" to you!