Texas-Heavy Sub-Prime Bonds Show Potential for Valuation Bias

Nov 08, 2012, 09:00 ET from Opera Solutions

NEW YORK, Nov. 8, 2012 /PRNewswire/ -- A research report published today by Opera Solutions suggests that mezzanine-level Subprime bonds securitized by Texas loans will likely have higher valuations than mezzanine Subprime bonds without Texas exposure.  This new insight builds upon prior Opera Solutions research showing that Texas mortgages had the highest average interest rates and lowest LTV among major non-agency RMBS mortgage markets.  The latest findings, published in the November edition of Mobiuss Market View, 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 and the Mobiuss Market View author. "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."

The analysis also provides a detailed review of underwriting characteristics for Texas mortgages, which show that underwriting standards for Texas subprime loans were consistent with – and in some cases much better than - the broader universe of subprime originations, yet 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."

Mobiuss Market View is a monthly market commentary based upon the data, analytics and tools embedded within Opera Solutions' Mobiuss platform which is used to analyze the risks and values of mortgages and mortgage backed securities.  This report and other insightful research on the mortgage market can be accessed at www.mobiuss.com.

About Opera Solutions

Opera Solutions is the leading Big Data science company for driving significant enterprise-wide productivity gains through advanced predictive analytics. Its Signal Hub™ technologies provide the ability to continually extract and put to use newly available predictive information from outside their firewalls, creating a revolutionary pathway to productivity, profit, and advantage. With 230+ data scientists among its 700 employees, the company is an internationally recognized leader in machine learning. It serves enterprises in Financial Services, Healthcare, Government, Supply Chain, Marketing, and other sectors, with offices in North America, Europe, India, and China.

SOURCE Opera Solutions