An increasingly wide band of market players looking to express a shorting interest in home-equity ABS has ballooned the credit default swap market on the month to more than $4 billion in bid and offer lists - surpassing cash market volumes, according to Lehman Brothers, and gapping out spreads on CDS premiums by as much as 250 basis points. Most of the activity has occurred at the triple-B rated levels, and 90% of protection buyers have focused on the 2004 and 2005 vintages, indicating an overwhelmingly bearish view of the housing market going forward.

And while spreads are likely to retreat, Lehman Brothers still recommends buying, even at current levels, "due to the fundamental risks from a slower housing market." While performance statistics for the 2005 vintage home-equity ABS still appear to be in-line with the level of delinquencies seen at this time from the 2003 vintage, according to Friedman Billings Ramsey (see related story p 11), the expected slowdown in home price appreciation and rising mortgage rates are expected by many to add particular stress to mortgages originated this year, as subprime borrowers will find it more difficult to refinance.

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