Tranche warfare

Many investors have taken a negative view on US subprime mortgages over the past year through credit default swaps. But with the US Congress putting pressure on servicers to modify the terms of loans to help borrowers avoid default, those trades might not perform as well as initially hoped. This has infuriated some major investors and could have a knock-on effect on documentation

The US subprime housing market has taken a nosedive. Sixty-day delinquency rates for subprime interest-only and option adjustable rate mortgages jumped from 3.47% in December 2005 to 13.06% in February 2007, according to San Francisco-based research and analytics firm LoanPerformance. The deterioration in loan quality has also been reflected in the ABX.06-2 BBB-, an index that comprises credit default swaps (CDSs) referencing 20 US subprime home equity loans originated in 2006 and rated BBB-. On