Texas-based loans used as collateral in seasoned residential mortgage-backed securities have a weighted average coupon (WAC) that is higher than expected given the state's stable housing market, according to Bill Hunt, vice president of Opera Solutions.
“[Texas PL RMBS loans] had performed very well in terms of home prices, not like California or Vegas. It was a pretty steady market throughout the onset of the credit crisis and onward. It was healthy,” Hunt said.
Given this trend, one might think that “if people were truly doing risk-based pricing,” assuming it was based only on the loan-to-value ratio that is traditionally a key determinant, the WAC on loans from Texas would be relatively low, he said.
“One would have expected more consistency, based on the original loan-to-value ratio,” said Hunt.
The Lone Star State has one of the 10 highest average PL RMBS WACs in the country, said Jon Digiambattista, a vice president at Opera. He noted that the state is also in the top 10 in terms of the overall unpaid loan balance. And when compared to similar states that also have major metropolitan areas and relatively larger populations, the average WAC on its PL RMBS loans is higher “by a considerable margin,” said Hunt.
When asked why PL RMBS loans in Texas might have a higher average WAC, Hunt said this would be among the issues Opera’s analysts plan to explore further in future research. “There could be a lot of factors,” he said, noting that among the possible contributing ones could be original loan-to-value ratios, adverse selection as borrowers who can have refinanced out of their original loans, documentation, local market factors, interest rates at the time for certain products, and state regulation.