The U.S. mortgage market totalled around $3 trillion in 2007 but has since declined following the collapse of the market's subprime sector, which accounted for around 20% of the total. Consequently, newer mortgage-based trading products have recently appeared, allowing traders more opportunities to short the market.
Traders and investors wanting exposure to the U.S. mortgage market have typically faced two choices: mortgage indexes based on either stock or home values; or mortgage-backed securities, usually collateralized bonds. The latter market collapsed spectacularly in 2007, particularly at the $600 billion subprime end, and smacked the global investment banking sector.
The Chicago Mercantile Exchange lauched the first investment vehicles for the mortgage market - CME Group real estate products - in 2006. CME listed futures and options contracts based on the value of the widely-quoted S&P/Case-Shiller Index of the U.S. housing market, which follows the house prices of 10 U.S. cities with a two-month lag. The contracts extend from 18 months up to 60 months out, listed quarterly and biannually. CME has since added similar contracts for commercial real estate.
Index-product innovater MacroMarkets LLC recently filed to launch MacroShares Major Metro Housing Up and Down securities based on the S&P/Case-Shiller Index essentially become the first U.S. mortgage-market ETF. Observers have praised the new product for opening new opportunities in an illiquid section of the asset market and expect it be used similarly to medium-term and long-term CME housing futures contracts.
The KBW Mortgage Finance Index (MFX) takes a different track. Rather than use the home-price-tracking S&P/Case-Shiller Index for becnhmarking, MFX tracks the broad performance of stocks in companies like Fannie Mae and Countrywide that are heavily exposed to the mortgage market. Options on the MFX are traded on the International Securities Exchange (ISE) and the Philadelphia Stock Exchange(PHLX).
- World markets engulfed by US mortgage crisis· Dow falls below 12000 for first time in five months. The Guardian.
- CME Group Extends Offerings of S&P/Case-Shiller Housing Contracts. PRNewswire-FirstCall.
- MacroMarkets to launch exchange-traded securities benchmarked to U.S. Home Prices. MacroMarkets.
- MacroMarkets Targets Housing. IndexUniverse.com.