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We have heard so many times about the high inventory and lowering prices of the national real estate market in the past few months, but this report out of Bloomberg is a bit unnerving. Traders of mortgage backed securities are expecting a rash of foreclosures on the creative loans that have been issued in the near term. That combined with an over supply of housing is creating a good deal of tension in the mortgage derivative market.

The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding.

The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale as measured by the National Association of Realtors is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998, Moody’s Investors Service said Oct. 17.

“Delinquency trends and home prices” show a weakening real estate market, said Scott Eichel, head of credit trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds backed by mortgages. “A lot of investors that have concerns about the housing market” are using the ABX index to speculate on a continued drop, he said. 

Read the rest of this outstanding article at  Bloomberg.com: U.S..

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