MIAC Press Releases

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Subprime Crisis – Round II?

…In August 2007, the bond rating agencies apparently saw enough empirical evidence to dramatically revise their estimates for subprime collateral behavior. Shortly thereafter, their rating actions resulted in not only a dramatic number of lower tier bonds being downgraded but also created a complete aversion by investors to owning the higher grade bonds as well. This mass exodus from owning even highly rated mortgage bonds secured by subprime collateral was unanticipated in most quarters and is one of the principle causalities of the “subprime liquidity crisis”. Regrettably, history is about to repeat itself, because in January the three largest bond rating agencies again saw enough empirical evidence to dramatically revise their estimates for delinquency and foreclosures behavior for subprime collateral. The question of the day is: What will be the consequences of these rating actions?

• Further widening in AAA and AA spreads?
• Greater accumulation of a vulture capital to bid on these assets?
• An increased willingness to sell these distressed assets at distressed price

…Regardless of how you see the CMO/CDO markets responding the latest round of rating actions, all investors are struggling to determine what the current market consensus is for various types of subprime collateral foreclosure behavior. Historical regression-based analysis has a limited utility when the underlying causes of the foreclosure behavior are in uncharted waters The recent empirical data supports that falling real estate values has the predominate impact on rising foreclosure rates and predicting the end of the real estate downturn is an open question. Nevertheless, the central question to mortgage asset valuation continues to be to identify a market consensus for collateral behavior in the pricing process.

…On the sunnier side, the dramatic Fed rate cuts appear to be lining up a tidal wave of agency eligible refinancing and with a strong prospect of higher loan limits, the refinancing levels could easily be historic. Never a dull moment in Mortgageland!

…In this issue of MIAC’s Quarterly Perspective, Tina Reid-Freeman, SVP, Secondary Solutions Group, introduces “Dynamic Execution: A Breakthrough in Pipeline Risk Management“. In the ensuring flood of refinancing activities, if a mortgage banker employs a secondary hedging approach that fully utilizes Dynamic Execution, they will not only protect the value of your secondary pipeline loans, but also improve the price execution. Properly integrating mortgage servicing rights pricing, valuation and risk metrics is the key to successfully implementing a Dynamic Execution approach to secondary risk management.

Additionally, Robert Branthover, SVP, Secondary Solutions Group examines a recent SEC staff bulletin, SAB 109 regarding the Valuation of Mortgage Servicing Rights (MSR) in your Loan Commitment Pipeline.

…Rob Fear, SVP, Asset Sales Group, with “Nonprime Market in Distress” reviews some of the meaningful recent trends in the subprime mortgage crisis and the opportunities and implications for investors. Mr. Fear emphasizes how having not only the proper software tools but also in combination with the anticipated asset collateral behavior are the keys to take advantage of these opportunities.

…Rob Lee, SVP, Capital Markets Group, with “MSR Valuation Commentary” reviews some the major changes in mortgage collateral behavior and how these changes effect mortgage asset valuations. How is the current subprime crisis different than previous liquidity crisis’s? What does this subprime meltdown mean for holders of subprime MSRs, whole loans, and residuals?

…And finally, Dan Thomas, Managing Director, Asset Sales Group, with “MSR Market Perspectives” reviews the MSR market trends and recent MSR transaction activities. With all the volatility in the capital markets, an increasing number of MSR holders are selling their MSRs to raise liquidity on their balance sheets and this represents opportunities for institutions with stronger capital bases.

Bob Husted……………..Paul Van Valkenburg