Discussion

					Comments on
 “Vintage and Credit Rating:
  What Matters in the ABX Data
  During the Credit Crunch”

     Shane Sherlund
     Federal Reserve Board*

     *The views expressed herein are mine alone and do not necessarily reflect the
     views of the Board of Governors, its members, or its staff.
Discussion

    Very nice, careful paper!

    Decompose movements in ABX-HE prices
                              120

                              100

                               80
                  ABX price




                               60

                               40


                               20

                                0
                                 06Q1 06Q3   07Q1   07Q3   08Q1   08Q3




Source: Markit.
Discussion

    Common factors
                                                                                         40

                                                                                         20




                                                                                               HPA (percent)
                                                                                         0

                                      120                                                -20
                                      100
                         ABX prices




                                                                                         -40
                                       80
                                       60
                                       40
                                       20
                                        0
                                         06Q1 06Q3   07Q1   07Q3   08Q1     08Q3

                                              2006-1 AAA      2006-1 BBB-          HPA
                                              2007-1 AAA      2007-1 BBB-




Source: Markit, RadarLogic.
Discussion

    Ratings factors

                                      120


                                      100
                  2006-1 ABX prices



                                      80


                                      60


                                      40

                                      20


                                       0
                                        06Q1 06Q3   07Q1   07Q3   08Q1   08Q3

                                            AAA      AA       A      BBB        BBB-




Source: Markit.
Discussion

    Vintage factors
                                   110
                                   100

                                    90
                  AAA ABX prices



                                    80
                                    70

                                    60
                                    50

                                    40

                                    30

                                    20
                                      06Q1 06Q3   07Q1   07Q3   08Q1     08Q3

                                         2006-1     2006-2      2007-1          2007-2




Source: Markit.
                                       Cumulative Default Curves
                                          September 2008




Source: Calculations from First American LoanPerformance.
Discussion

    Liquidity effects
                                                                                       400




                                                                                              LIBOR-OIS (basis points)
                                                                                       300

                                                                                       200

                                                                                       100
                                          120
                                                                                       0
                                          100
                             ABX prices




                                           80                                          -100

                                           60
                                           40
                                           20
                                            0
                                             06Q1 06Q3   07Q1   07Q3   08Q1   08Q3

                                                2006-1 AAA      2006-1 BBB-     LIBOR-OIS
                                                2007-1 AAA      2007-1 BBB-




Source: Markit, Federal Reserve.
Discussion

   Common factor
       Relatively small effect early on; low correlation
       Onset of financial turmoil, significant and persistent increase
             Systematic, non-diversifiable risk
             High correlation across assets


   Asset rating and vintage factors
       Effects decrease over time
       Distinguish between vintages and tranches
       Roles in asset volatility small
Discussion

   Liquidity premium
       Influence increased at onset of financial turmoil
       Along with common factor, accounts for downward pressure on
        ABX prices
             Across ratings
             Across vintages
Comments

   Composition of each vintage
       Underwriting
       Geography
                                                     House Price Appreciation
                                                            2000-2008


                                        30

                                        20                                    CA, FL, AZ, NV
                Percent (annual rate)




                                        10
                                                                                  National
                                         0
                                                                 OH, MI, IN
                                        -10


                                        -20

                                        -30
                                              2000      2002     2004         2006           2008



Source: FHFA House Price Index.
   Percent of Subprime Mortgages with Negative Equity by State
                           2005-2008



                                              70

                                              60
                                                                          CA, AZ, FL, NV
                                              50
                           Percent of loans



                                              40

                                              30
                                                                                           OH, MI, IN
                                              20

                                              10
                                                                                           Rest of U.S.
                                               0
                                                   2005    2006              2007              2008




Source: Calculations from First American LoanPerformance, FHFA and S&P/Case-Shiller house price data.
                                             Serious Delinquency Rates by State
                                                          2005-2008



                                              35

                                              30                       CA, AZ, FL, NV

                                              25
                          Percent of loans



                                              20

                                              15          OH, MI, IN
                                                                               Rest of U.S.

                                              10

                                               5

                                               0
                                                   2005        2006    2007       2008




Source: First American LoanPerformance.
Comments

   Liquidity effect
       Investors?
       Borrowers?
       Both?
                                           Subprime Mortgage Rate Resets
                                                  September 2003



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                           Subprime Mortgage Rate Resets
                                                  September 2004



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                           Subprime Mortgage Rate Resets
                                                  September 2005



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                           Subprime Mortgage Rate Resets
                                                  September 2006



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                           Subprime Mortgage Rate Resets
                                                  September 2007



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                           Subprime Mortgage Rate Resets
                                                  September 2008



                                         350000

                                         300000

                                         250000
                       Number of loans




                                         200000

                                         150000

                                         100000

                                         50000

                                             0
                                                  2002   2004   2006   2008   2010   2012




Source: First American LoanPerformance.
                                  Cumulative Prepayment Curves
                                        September 2008




Source: Calculations from First American LoanPerformance.
Comments

   Measure of fit?
       R-squared (pseudo R-squared)
       “Variance decomposition”
Summary

   Ratings and vintage factors
       Effects decreased over time
       Role in asset volatility small


   Common factor
       Significant and persistent effect once financial turmoil started
       Systematic risk; high asset correlations


   Liquidity premium
       Influence increases over time

				
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