Wednesday, November 07, 2007

Fundamentals, not liquidity conditions, are behind MBS crash

Good luck to all the banks and especially the monoline insurers that still think that the ABX Indices ( see also The AAA Trap via Sudden Debt ) are not reflecting the market price....... But as long as they can convince the auditors.......

Viel Glück all denen die die immer noch glauben das die ABX Indizes ( siehe auch The AAA Trap von Sudden Debt ) nicht den wahren Wert wiederspiegeln..... Aber solange die Buchprüfer diese Zahlen abnehemen......

Fundamentals, not liquidity conditions, are behind MBS crash / FT
Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:
The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.

Hat tip to Barry Ritholtz who has also more on this topic Financials: Worse than they look?

Dank an Barry Ritholtz der zum Thema ebenfalls treffendes zu sagen hat Financials: Worse than they look?


At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent - with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages - that is, second mortgages on a property, the loss severity rates average 94 per cent.

> By the way MBIA is on the hook if the losses for their RMBS CDO´s are greater than 22-28 percent.........

> Ganz nebenbei bemerkt ist MBIA ab Verlusten von 22-28 % bei Ihren RMBS CDO´s in der Haftung.....

So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher - which means the number of occasions when the above loss severity ratios have to be applied are increasing.

And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004:

According to CreditSights, that should “up-end the idea that the 2004 vintage was perhaps sufficiently seasoned and composed of loans that had enjoyed enough home price appreciation since 2000, to avoid any further erosion.”

As it is, foreclosure rates are hovering at around 13 per cent on 2005 and 2006 mortgage debt. But CreditSights say there is “no end in sight” when it comes to that figure rising.

Consider then the outlook for delinquancy rates - a measure of mortgage loans not yet in foreclosure, but in trouble:

Add the 7 per cent delinquency rate for the 2006 vintage to the 2006 foreclosure rate at 12.6 and it’s already close to 20 per cent.

How then does that translate into the world of structured finance, and those RMBS tranches?

To trigger a default on the most secure subprime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent.

As can be seen from the results of CreditSights’ survey, that scenario is indeed becoming “less and less unthinkable”. Adding the foreclosure and delinquancy rates takes us close to 20 per cent. Both are set to increase. Then there’s those painfully low severity loss ratios. Add it all together and that AAA debt is far, far, far from safe.

And we haven’t even mentioned prime tranches lower down the structure.

Far from mispricing RMBS, CreditSights even go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) are throwing up some pretty appropriate figures.

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Blogger jmf said...

Shocking news from the UK

Bank of England Keeps Key Rate Unchanged at 5.75%

4:36 AM  
Anonymous Anonymous said...

"Liquidity , not fundamentals conditions, were behind MBS boom"

2:33 PM  
Blogger jmf said...

Moin Anon,

excellent point!

10:33 PM  
Anonymous Anonymous said...

Ja, die Fundamentals:

Like I’ve said before, there is a lot of dead fish deep in the waters, just give it a week before everybody will feel that smell…

European markets have no backbone. Today was like other days: Europe opens mostly up, then treads water, I guess waiting for the US open. Now that US futures point lower, Europe has headed lower. Emerging markets seem to be more independent.

Also important for the MBS boom: the ability to pass on the risk. Now that the secondary mortgage market is pretty much dead (especially for non-conforming loans), although there is money to lend ("liquidity"), no one wants to hold the risk.


5:07 AM  
Blogger jmf said...

Moin Eh,

i think the turnaround today was due to Barclays.

The German market is still outperforming the rest.

But i think this won´t hold on for longer.

A nice example was Allianz today. Right after the release the stock jumped 8 € close to 150.

I have looked into their results. They beat only because the have written down a tiny fraction of their CDO exposure..... Now back to 142 €

But their maximum exposure in subprime is 2 billion and a total of 8 billion in ABS in general.

I´ll put them on the wl. compared to other financial stocks their exposure is tiny.

The should have used todays earnings to write down billions and not only 500 mio..... They missed this chance!

It looks the spam attacks have stopped. So w´ll probably switch back to the old system

5:20 AM  
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11:10 PM  

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