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com

Adelson & Jacob Consulting, LLC

The Future of Securitization
Mark Adelson Adelson & Jacob Consulting, LLC www.adelsonandjacob.com Moody's Corporation & NYU Stern School of Business

5th Annual Credit Risk Conference
Skirball Center at 566 LaGuardia Place New York City 14 May 2008

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Adelson & Jacob Consulting, LLC

Fed Funds Target Rate, NASDAQ Composite Index, and Annual Rate of U.S. Home Price Appreciation
16 14 12 10 8 6 4 2 0 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Federal Reserve, Yahoo
14 May 2008 2

Fed Funds Target Rate (%) NASDAQ (1990=1) U.S. HPA (%)

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Adelson & Jacob Consulting, LLC

U.S. Mortgage Originations
4.0 3.5 3.0 ($ trillions) 2.5 2.0 1.5 1.0 0.5 0.0 2008P 2009P
3

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: Inside Mortgage Finance, Mortgage Bankers Associations
14 May 2008

2007

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Adelson & Jacob Consulting, LLC

U.S. Public Home Equity ABS Issuance
100
500

80 ($ billions)

400

60

300

40

200

20

100

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

0
2008P
4

2001

2002

2003

2004

2005

2006

Source: Moody's, Bloomberg, Asset Securitization Report
14 May 2008

2007

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Insured Portion of U.S. Home Equity ABS Issuance
100% 80% 500 400 300 200 100 0

Insured Portion Issuance Volume

60% 40% 20% 0%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Sources: Asset-Backed Alert Database (insured portion), Moody's, Bloomberg, Asset Securitization Report
14 May 2008 5

2006

Issuance Vol ($ billions)

Insured Portion

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Adelson & Jacob Consulting, LLC

Home Equity ABS Yield Spreads over Swaps/LIBOR and Annual Structured Finance CDO Funded Issuance Volume
450 400 Spreads (basis points) 350 300 250 200 150 100 50 2001
14 May 2008

240
SF CDO Issuance ARM BBB- Spread ARM BBB Spread Fixed BBB Spread

210 Issuance ($ billions)
6

180 150 120 90 60 30 0

2002

2003

2004

2005

2006

2007
Source: JPMorgan

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Adelson & Jacob Consulting, LLC

Sub-prime Performance (12/2007)

Source: Moody's
14 May 2008 7

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Adelson & Jacob Consulting, LLC

Sub-prime Performance (12/2007)

Source: Moody's
14 May 2008 8

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Adelson & Jacob Consulting, LLC

Sub-prime Downgrades in 2007

Source: Moody's
14 May 2008 9

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Adelson & Jacob Consulting, LLC

Basic HEL ABS Structure – Tranching
100

80

60 Loans 40

AAA

20

0 Underlying Assets

AA A BBB Residual Securities

14 May 2008

10

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Adelson & Jacob Consulting, LLC

HEL ABS Deal Structure – Tranching
100

80 Tranche Losses (%)

60
Assets

40

Residual BBB A

20

AA AAA

0 0 10 20 30 40 50 60 70 80 90 100 Pool Losses (%)
14 May 2008 11

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Adelson & Jacob Consulting, LLC

CDO Downgrades in 2007

Source: Moody's
14 May 2008 12

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Adelson & Jacob Consulting, LLC

The Current Situation
Defaults are likely for most 2006-07 sub-prime mortgage ABS tranches initially rated triple-B Defaults are likely for many 2006-07 sub-prime mortgage ABS tranches initially rated single-A These defaults are not surprising in an environment of declining home prices SF CDO tranches rated triple-A are likely to default because of concentrated exposure the triple-B and single-A layers of sub-prime mortgage deals CDO professionals did not expect so many securities rated at the triple-B and single-A levels to default at the same time because they had not observed it in the recent past

14 May 2008

13

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