On Price, Intrinsic Value, MBS, and Mark-to-Market

[TheBreeze]

[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.

[/quote]

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?

[davelj]

[quote=barnaby33]I still feel you need a hug.

If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?

I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.

Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.

You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.

When we can bring data, then the market can clear![/quote]

Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).

Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.

Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.

Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.

I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.

What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.

I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.

[davelj]

[quote=barnaby33]I still feel you need a hug.

If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?

I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.

Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.

You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.

When we can bring data, then the market can clear![/quote]

Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).

Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.

Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.

Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.

I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.

What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.

I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.

[davelj]

[quote=barnaby33]I still feel you need a hug.

If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?

I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.

Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.

You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.

When we can bring data, then the market can clear![/quote]

Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).

Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.

Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.

Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.

I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.

What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.

I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.

[davelj]

[quote=barnaby33]I still feel you need a hug.

If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?

I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.

Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.

You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.

When we can bring data, then the market can clear![/quote]

Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).

Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.

Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.

Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.

I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.

What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.

I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.

[davelj]

[quote=barnaby33]I still feel you need a hug.

If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?

I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.

Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.

You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.

When we can bring data, then the market can clear![/quote]

Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).

Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.

Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.

Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.

I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.

What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.

I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.

[davelj]

[quote=TheBreeze][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.

[/quote]

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?

[/quote]

My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.

[davelj]

[quote=TheBreeze][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.

[/quote]

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?

[/quote]

My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.

[davelj]

[quote=TheBreeze][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.

[/quote]

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?

[/quote]

My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.

[davelj]

[quote=TheBreeze][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.

[/quote]

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?

[/quote]

My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.

[davelj]

[quote=TheBreeze][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.

[/quote]

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?

[/quote]

My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.

[TheBreeze]

[quote=davelj]
My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.[/quote]

How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?

Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can’t buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?

Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?

Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.

At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.

…

This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.

http://mrmortgage.ml-implode.com/2008/12/20/mortgage-debt-is-more-toxic-than-most-think-even-prime-loansmbs/

By the way, I’m not trying to be a smartass here, I’m just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.

[TheBreeze]

[quote=davelj]
My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.[/quote]

How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?

Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can’t buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?

Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?

Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.

At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.

…

This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.

http://mrmortgage.ml-implode.com/2008/12/20/mortgage-debt-is-more-toxic-than-most-think-even-prime-loansmbs/

By the way, I’m not trying to be a smartass here, I’m just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.

[TheBreeze]

[quote=davelj]
My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.[/quote]

How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?

Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can’t buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?

Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?

Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.

At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.

…

This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.

http://mrmortgage.ml-implode.com/2008/12/20/mortgage-debt-is-more-toxic-than-most-think-even-prime-loansmbs/

By the way, I’m not trying to be a smartass here, I’m just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.

[TheBreeze]

[quote=davelj]
My friends use things called “spreadsheets” and make simplifying (bearish) assumptions about the characteristics of the different portions of the pools. It’s not feel, but rather math. But, more specifically, you do have to make assumptions. That’s necessary for modeling purposes. And those (loss) assumptions will be based on default, foreclosure, and recovery assumptions. But if you define every assumption in the financial world as a “feeling” – which is fine – and therefore not to be used or trusted (which is the implication of your post), then I assume all of your money is in your mattress at home. Because assumptions (“feelings” in your parlance) are how assets get valued. By all means, feel free to do your own analysis on this pool. Yes, there are people doing this. (Wasn’t that obvious from my post?) Yes, it’s worth doing (again… not obvious from my post?). Well at least to some folks apparently.[/quote]

How do they get the recovery assumptions? Are they actually evaluating the individual properties in each pool or are they doing something else? Do you agree that using some type of rent multiplier is a good way to value a property?

Did I understand your original post correctly, in that there are the potential for 25% annual returns? And the reason banks can’t buy this stuff and get those 25% returns is because if the marks keep going down then they will have to engage in some kind of fire sale? Interesting. So are you investing with your own private capital then?

Since you think mark-to-market is a bad idea, do you think the creation of a US Prime Mortgage Security Index as described by Mr. Mortgage in this post is a bad idea?

Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.

At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.

…

This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.

http://mrmortgage.ml-implode.com/2008/12/20/mortgage-debt-is-more-toxic-than-most-think-even-prime-loansmbs/

By the way, I’m not trying to be a smartass here, I’m just trying to reconcile your view with Mr. Mortgages, as both of you seem to be knowledgeable in this area.

[Author]

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