[quote=davelj]
CWABS Asset-Backed Certificates Trust 2007-7 is comprised of almost 5,000 subprime mortgages with aggregate principal of just over $1 billion. There are two pools, both conforming and non-conforming, and 64% of the Trust is comprised of 1st liens, with the remainder second liens. There are 16 tranches, or certificates, the top 6 of which are rated AAA. In this particular deal, if the subordinated tranches are wiped out, principal payments are apportioned to the senior-most tranches until they are paid down completely. The current quote on the AAA certificates is 56. Three months ago the quotes were in the 80s. The expected yield is about 23% with an expected weighted life of 2.5 years. Now, here’s the critical part: Holders of the AAA certs will achieve this yield if 83% of the Trust’s remaining principal balances are liquidated at 71% loss severity. If the loss severity goes to 85%, the yield drops to the low double digits on the AAAs – not too bad. Now, I’ve omitted a lot of info for brevity, but you can delve into some of these securities yourself here: http://consusgroup.com/v2/landing_pages/companies_sub/C14.asp.

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Where did you get those loss severity numbers? Since your whole thesis that this TLA is undervalued rests on those numbers surely you have some basis upon which to believe the loss severity is going to be 71% versus 98%? You’ve used math, but as far as I can tell, you’re using “feel” to get the loss severity numbers. I thought we weren’t supposed to do that.

You’ve done a top-down analysis. What I would like to see is someone identify each of those 5,000 properties and then value each of those properties based on some type of equivalent-rent multiplier. Once that is done, you could get a value for the entire pool (minus some percentage for foreclosure costs and what not). Are there people doing this? If not, why not? If there is truly the potential for 25% returns, surely the work involved in dong something like this would be worthwhile, wouldn’t it?