November 7, 2007
AAA Subprime 80 cents on the dollar – a good estimate not wild speculation
Analysis of:
AAA Sub-Prime Valuation Issues | ftalphaville.ft.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Implications: Recent suggestions that the ABX index is a poor proxy for AAA subprime RMBS fail to recognise its value.
Analysis: Research published by CreditSights indicates that sub-prime foreclosure rate on RMBS have reached 12-13% for 2006 vintage loans with a further 7% delinquency rate. The rates of increase show no sign of decelaration with rates of default and delinquency increasing exponentially each year post 2004. Neither does 2004 look even close to maturity. 2007 vintage is substantially worse than 2006 at the same stage with well over double both foreclosure and delinquency rates. To trigger a default on the most secure sub-prime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent. CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. CreditSights go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) looks about right.
Analysis: Research published by CreditSights indicates that sub-prime foreclosure rate on RMBS have reached 12-13% for 2006 vintage loans with a further 7% delinquency rate. The rates of increase show no sign of decelaration with rates of default and delinquency increasing exponentially each year post 2004. Neither does 2004 look even close to maturity. 2007 vintage is substantially worse than 2006 at the same stage with well over double both foreclosure and delinquency rates. To trigger a default on the most secure sub-prime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent. CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. CreditSights go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) looks about right.
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