A subset of the correlation argument is use of substitute assets where in fact the investment itself or the investment manager’s style was created to give some profile security in a declining stock market. Mutual funds employing a “long/brief” or “market-natural” strategy are available to provide some loss protection but still maintain liquidity. Obviously the grade of that investment is highly dependent on the fund supervisor and account strategy; care should be studied when integrating such assets into a portfolio.
Alas, the rest of the loans are truly atrocious and 23 percent surplus collateral is not enough. This delinquency is almost 20 times as high as Freddie Mac’s typical (non-credit-improved) mortgage book. There is 12 percent (and toned) early-stage delinquency, 16 percent (, and rising) late stage delinquency, 13 percent (, and falling) foreclosures and 6 percent (and toned) personal bankruptcy and REO.
That is 47 percent problematic loans. I have only educated guesses concerning how many of the will eventually default – but an upper-end assumption is that end default should be 1.2 times current delinquencies. Not all the first stage delinquents will default of course – but there will be new delinquency plus some non-delinquent loans will eventually default. Anyway an acceptable (though high-end) think is that 56 percent of exceptional principal will eventually default. Still, 56 percent defaults would not impair us significantly if loss severity was only 50 percent. In the end we still have considerable excess collateral left on this loan pool prior to the AAA securitisation tranches are impaired.
Unfortunately severity is running MUCH higher than 50 percent. Here is the severity for both the combined group 1 and Group 2 loans. Note severity is running about 75 percent. That is high and suggests very bad loan servicing implausibly. Still, this suggests that the end loss from the Group 1 pool to come is very high – 56 percent default and 75 percent severity – suggesting 42 percent of the remaining pool will be lost. I am not going to go through this but it is significantly worse for the Group 2 loans (the ones Freddie turned down). The delinquency for Group 2 loans is higher even.
- What are you most getting excited about at MR&H 2019
- Purchase and sale of investment securities
- New build duplexes in San Antonio and Austin – $350-$425k – decent selection
- 2014 122,504 131,080 8,575
- Let lenders know if someone gave you a much better offer and let them WIN YOU OVER
- Ongoing monitoring and advice
- Knowledge of the industry
- Design products
Remember above I showed that there were 326.2 million in Group 1 remaining outstanding. The loss is thought by us with this will be 42 percent or 137.0 million. There is 61 however.9 million excessively collateral protecting the AAA certificates. That may all be lost and 75.1 million in losses (137.0-61.9) will be been to on Freddie Mac.
28.4 percent of the exceptional balance. The framework protected them – Group 2 loans will have much bigger losses – but losing 28. 4 percent of the outstanding balance is still atrocious. It’s a better class of dross. I’ve fiddled with a lot of Mac securitisations in the course of writing this series. Generally Freddie securitisations had structural features which meant that Freddie Mac losses were smaller than market losses but are large nonetheless. Nevertheless the 2006-11 series is an especially bad series (subprime, late in the growth).
Most series have losses for Freddie below 25 % of outstanding amounts remaining as of June 30. Any mark worse than that and they’re going to create back the surplus over time. Note the amortized cost of the subprime publicity is 63.9 billion and the gross unrealized reduction is 24 billion.