No Clear End to Subprime Woes, Says Bond Manager: The industry is at the end of 'a 30-year shift to funding through the global capital markets' and away from portfolio lenders.

SAN FRANCISCO -- Will the mortgage industry's current decline reverse itself by January 2008? MBA chief economist Douglas Duncan predicted it will. PIMCO Senior Vice President Jennifer Bridwell said not.

Speaking at the 35th annual Western Secondary Market Conference in San Francisco, Ms Bridwell pointed to the impact of 2008 ARM resets as a serious bump in the road likely to bring more defaults and delay recovery. Mr. Duncan did not openly disagree but suggested that a generally healthy economy would blunt the effect of further subprime woes.

Mr Duncan reminded attendees that the mortgage industry is at the end of "a 30-year shift to funding through the global capital markets" and away from portfolio lenders such as the S&Ls. He said the current tightening of underwriting standards has brought the mortgage industry a 10% decline in production and a 50% decline in securitization. While investors are no longer willing to buy subprime ARMs, he reminded attendees that "subprime is not going away."

"We will see the peak in delinquencies in the next 2 to 4 quarters" and the peak in foreclosures within the next 6 quarters, Mr. Duncan predicted. Instead of blaming exotic loan products, he pointed to local market conditions, particularly to high unemployment in states such as Ohio, Indiana, Michigan, Louisiana and Mississippi.

Giving a bond manager's view of the current situation, Jennifer Bridwell, MBS/ABS product manager for Newport Beach, CA-based PIMCO, said "investor confidence in the non-agency market has been shaken" by the subprime collapse and predicted that the bond market is poised for cumulative losses. "We think there are a lot of downgrades coming" in the wake of subprime resets in late 2008, she predicted, forecasting that the market would not bottom out until 2009.

With world headquarters in Newport Beach, California, as of March 31, 2007 PIMCO had 867 employees handling $687.1 billion in fund-management assets, $280 billion of that in mortgage debt - but none currently in subprime, Ms Bridwell stressed. To get back in the subprime market, investors will want "compensation for risk, wider spreads or both," she said.

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