After ending 2007 in disastrous fashion and becoming a downright pariah in 2008, the MBS market is in desperate need of inspiration.
During the past couple of months, mortgage lending professionals and the dealers of Wall Street have been plumbing what remains of their MBS groups for ideas on how to bring borrowers and investors back to the transaction table.
Some ideas are better than others. On the securities side, dealers have come up with what are being called superduper senior Alt-A hybrids to coax back investors who fear taking credit losses. The so-called superdupers are designed to have more credit enhancement than super seniors, according to UBS.
superduper (yes, superduper) bonds are created by taking the super senior triple-A classes of Alt-A hybrid deals and giving them twice the credit enhancement of the super senior triple-A bonds. For its analysis, UBS created a hypothetical superduper Alt-A 5/1 bond by credit tranching an existing super senior Alt-A bond and subordinating 20% of the 2A1 tranche. The superduper cash flow has a 34.2% credit enhancement.
"For Alt-A 5/1 hybrid collateral, 34.2% is a tremendous amount of credit enhancement," UBS said. It added that it chose a deal with a pro rata pay structure on all classes, and a transaction that has subordinate tranches that are locked out from principal payments for about three to five years offers more protection from seniors.
Assuming 15% CPR and 50% loss severity, it would take a 16.1% constant default rate (CDR) per annum for the superduper bond to suffer its first principal loss. To put it into context, it compares to a break even CDR of 4.9% and a cumulative loss of 11.6% for the actual super senior 2A1 tranche. Based on expected losses for Alt-A 5/1 collateral to be around 8%, the superduper bond had effective loss coverage of about three times.
Still, the dealers were not impressed.
"And the name sounds funny," said one market source at a large dealer last week.
Maybe this exercise did not impress some market players, but it beats some of the ghastly attempts at recovery that were under way in the mortgage lending end of the business.
About two months ago, a company called TradeLine Solutions, in San Diego, launched what it described as a "sought-after yet controversial quick fix for borrowers with poor credit."
That pitch made me twitch in my chair from the outset. But wait; it got worse. "For the first time in history," the release ballyhooed, "borrowers can purchase someone else's perfect credit and the account will reflect on their record in three to five days."
These "seasoned primary accounts," as the company called them, add customers as joint users on perfect credit accounts prior to closing, then removes the original account holder after the balance is paid off. Officials at TradeLine Solutions were not available for comment, and people familiar with the company said it had gone out of business.
Dealers and investors just endured a merciless wringing out, as banks took massive writedowns on portfolios secured by subprime mortgages. Investors are not done working through their trust issues with MBS, even with mounds of credit enhancement piled onto the bonds.
So, these "seasoned primary accounts" and other products like them should rightfully stay where no one wants or uses them.
(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.