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Bear to release new subprime MBS performance model

Bear Stearns plans to release an updated subprime performance model to its trading desk and the public by month's end, said Steven Bergantino, a managing director involved with updating the model.

Basic changes to the model include the incorporation of more recent subprime loan product, performance and prepayment data, and the addition of a loan-level severity model. The model was last updated in early 2002 with historical loan performance data from the late 1990s - when more than half of subprime loans were standard fixed-rated mortgages.

As a result, Bear traders will need to make fewer adjustments to the program's analysis in order to assess the distribution of collateral characteristics within newer vintage loan pools.

For example, more than 80% of currently issued subprime mortgages are adjustable rate, and while the average subprime borrower's FICO score has crept higher, so too have loan sizes, loan-to-value ratios, and interest-only loans.

New data to the model includes post-reset ARM prepayments, prepayments after penalty expirations, and chargeoffs on seasoned collateral. The model also will include occupancy, documentation, loan purpose and interest-only loan characteristics.

The loan-level severity model incorporates predicted losses into variations in collateral characteristics across deals and to home price assumptions used to project future loan-to-value ratios.

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