Considering the undisputed negative outlook for subprime mortgages, is it still possible for the ABX to overestimate expected losses on these loans? Experts say it is.
A recent JPMorgan Securities report said that current prices in the ABX senior tranches do two things: overstate expected loss and tail outcomes for losses. For instance, JPMorgan analysts said that in the case of ABX 07-1, they project a 36% cumulative loss in their worst-case scenario that results in 40% write-downs on the triple-A tranche. "Even with those levels of write-downs, current pricing would still offer returns of Libor plus 477 basis points, which already encompasses some premium for more bad news ahead,'" analysts wrote.