Who Will Subprime Get Next?

The big game in the market these days is figuring out which company or hedge fund will be stung next as a result of fallout from the housing market and the 'too loose for too long' mortgage lending market. First it was the borrowers themselves. After all none of this would be a problem if borrowers weren't defaulting on their home loans. Here's a shocking statistic: foreclosures are now up over 800% year over year. Yes, its safe to say subprime borrowers were the first and hardest hit by the housing slowdown.

Next came the monoline subprime lenders like Accredited Lenders, New Century Financial, Fremont Investment, NovaStar Financial etc. Those firms were hit hard in early March as banks noticed the high default rates and pulled financing. Many ceased operations within weeks and many are no longer 'going concerns'. Subprime lending as we knew it from 2003 - 2006 is almost completely gone.

Next came the homebuilders and the first wave of hedge funds. These hedge funds held either the stocks of subprime lenders or those who held subprime debt, including Thomas K. Brown's Second Curve fund which I wrote about several times back in March.

There are more subprime casualties coming to light every day: almost every single major bank and financial firms has been hurt badly and a small army of hedge funds including Sowood Capital, several Bear Stearns funds and hedge fund legend Paul Tudor Jones' (pictured above) Raptor Fund.

So who will be next? I think there are three areas of interest. First, the banks that did all of the pier lending (a bridge to nowhere) on private equity deals that haven't yet closed. They could be in for a big surprise if the credit markets don't clear up. Second, hedge funds and financial firms that are still marking their subprime debt holdings to model. Once more of this stuff starts hitting the market more and more blow-ups should be uncovered. Finally, foreign investors, governments and insurance companies should get hit very hard. If you check out the graph below you will see that they are some of the biggest buyers of agency mortgage backed securities. We can also presume that they also make up a large portion of private ABS securitizations.
Graph courtesy of Credit Suisse.