Mezzanine-level subprime bonds backed by Texas loans are likely to have higher valuations than mezzanine subprime bonds without Texas exposure, according to a report published today by Opera Solutions.
Opera Solutions research has previously shown that Texas mortgages had the highest average interest rates and lowest LTV among major non-agency RMBS mortgage markets. The latest findings show that the higher interest rates may be significant enough to justify higher bond valuations.
"We used the valuation capabilities of our Mobiuss platform to show that the high interest rates account for higher bond valuations, despite higher pre-payment expectations for deals backed by Texas collateral," said Bill Hunt, head of research. "That said, the high coupon rates combined with strong mortgage and property market performance indicate a wide range of expectations for future pre-payment rates."
Strong underwriting standards for Texas subprime loans are consistent with, and in some cases much better than, the broader universe of subprime originations. However, they still received much higher interest rates.
"Pre-crisis, Texas was underrepresented in terms of total new originations as subprime loans were disproportionately made in bubble markets like Florida and California," Hunt added. "It's conceivable that this coupon rate discrepancy says more about origination competition in other markets than it does about the risk-based pricing in Texas."