OCT 15, 2012 11:05am ET

Analytics Show Apparent PL RMBS Anomaly in Texas


Analytics have uncovered what seems to be a counterintuitive trend among Texas-based loans in seasoned private-label residential mortgage-backed securities.

PL RMBS data from BlackBox Logic run through Opera Solutions LLC’s Mobiuss platform show that despite Texas’ reputation for having one of the most stable housing markets in the country, the weighted average coupon on these loans is one of the highest in the nation among states with major metropolitan markets.

Texas PL RMBS loans, noted Opera Solutions vice president Bill Hunt, “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.”

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 the state would be relatively low, he said. “One would have expected more consistency, based on the original loan-to-value ratio,” said Hunt.

But research based on WAC and updated loan-to-value ratio data analyzed on a state-by-state basis using the Mobiuss platform show that that the trend in the state does not meet this expectation.

While there are some relatively smaller states population-wise where the WACs on PL RMBS loans are slightly higher than that seen in Texas, the Lone Star State has one of the 10 highest average PL RMBS WACs in the country, said Jon Di Giambattista, a vice president at Opera. He noted that the state also is 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.

According to Opera’s analysis, most of the WACs by state are in a 100 basis point band, but Texas WACs are “consistently” higher. The analysis shows this is particularly true for adjustable-rate mortgage WACs, which are almost 100 basis points higher than other states.

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. “One notion we are looking into now is, can we adjust out the underwriting of the loan and see if it is still a major differential?”

Mobiuss is used for trading, whole loan or securities portfolio analysis. The user base ranges from sell-side trading desks at broker-dealers to small commercial banks and credit unions. Researchers at Opera plan to use Mobiuss for going forward to analyze prepayments, interest rates, defaults, interest shortfalls, teaser rates, IO products, and real estate speculation and property flipping.


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