From Dow Jones:
An end isn’t anywhere in sight to the meltdown in subprime mortgage markets, the chief investment officer at Los Angeles-based TCW Group Inc. warned a gathering of investment professionals on Wednesday.
In his keynote address and an interview to kickoff the 19th annual Morningstar Investment Conference here, Jeffrey Gundlach pointed to continued pressure on subprime lenders.
“The subprime market is a total unmitigated disaster and it’s going to get worse,” Gundlach told money managers and financial advisers.
“The delinquency rate is still climbing,” he added. “At the same time, the ability of people to refinance is also going down. It’s just not a very attractive situation.”
Until a definite change occurs, Gundlach cautioned, subprime mortgages remains a place to avoid for investors.
“At some point you’ll be able to see past the valley,” he said. “But until then, you’re going to see continued downward pressure. And nobody knows when it’s going to end.”
He noted that delinquency rates aren’t all that high by historical standards. The problem, says Gundlach, is that “a perfect storm of conflicting factors” came together in February to push bond markets out of whack.
“Poor underwriting practices and mismatched loans were hidden by a robust real estate market,” Gundlach said.
Finally, the real estate market ran out of gas last year. “That was the underpinning of a meltdown in subprime in February,” Gundlach said.
Once markets turned down, early payment defaults rose rapidly. Gundlach pointed out that some 40 lenders went under in a six-week period earlier this year. Now, he says it’s up to about 80 defunct lenders in total.
Gundlach added that he sees strong correlations to some parts of today’s mortgage markets and real estate’s collapse in 1994. “But it’s on a smaller scale and limited to a narrower slice of the real estate market,” he said.